Tag Archives: Bakken

Why U.S. Oil Production Remains High While Prices Tank – Bakken Update

Summary

  • US production remains high due to high-grading, well design, cost efficiencies, and lower oil service contracts.
  • High-grading from marginal to core areas can increase per well production from 200% to 500% depending on area, which means one core well can equate to several marginal producers.
  • Shorter stages, increased proppant and frac fluids increase production and flatten the depletion curve.
  • EOG’s work in Antelope field provides a framework for other operators to increase production while completing fewer wells.
  • Few operators are currently developing Mega-fracs, this provides significant upside to US shale production as others start producing more resource per foot.
by Michael Filloon, Split Rock Private Trading and Wealth Management

US Oil production remains at volumes seen when WTI was at $100/bbl. Many analysts believed operators couldn’t survive, but $60/bbl may be good enough for operators to drill economic wells. Oil prices have decreased significantly, and the US Oil ETF (NYSEARCA:USO) with it. Many were wrong about US production, and the belief $60/bbl oil would decrease US production. Although completions have been deferred, high-grading and mega-fracs have made up for fewer producing wells. When calculating US production going forward, it is important to account for the number of new completions. If more wells are completed, the higher the influx of production should be. We are finding the quality of geology and well design have a greater effect on total production than originally thought.

(click to enlarge)

(Source: Shaletrader.com)

There are several factors influencing US production. Operators have moved existing rigs to core areas. This decreases its ability getting acreage held by production. In the Bakken, rigs have moved near the Nesson Anticline.

In the Eagle Ford, Karnes seems to be the area of interest. Midland County in the Permian has also been attractive. Operators have decided to complete wells with better geology. When an operator completes wells in core acreage versus marginal leasehold, we see increased production per location. This is just part of the reason US production remains high.

The average investor does not understand the significance. Most think wells have like production, but areas are much different. When oil was at a $100/bbl, it allowed operators to get acreage held by production, although payback times were not as good. Marginal acreage was more attractive, even at lower IRRs. Operators have a significant investment in acreage, and do not want to lose it. Because of this, many would operate in the red expecting future rewards. Just because E&Ps lose money, does not mean the business isn’t economic. It is the way business is done in the short term as oil is an income stream. Wells produce for 35 to 40 years, and once well costs are paid back there are steady revenues. Changes in oil prices have changed this, as now operators will have to focus on better acreage.

Re-fracs are starting to influence production. Although most operators have not begun programs, interest is high. Re-fracs may not be a game changer, but could be an excellent way to increase production at a lower cost. This is not as significant with well designs of today, but older designs left a significant amount of resource. More importantly, when operators began, it was drilling the best acreage. Archaic well designs could leave some stages completely untouched. Current seismic can now identify this, and provide for a better re-frac. We expect to see some very good results in 2016. In conjunction with high-grading, well design continues to be the main reason production has maintained. Changes to well design have been significant, and the resulting production increases much better than anticipated.

No operator is better than EOG Resources (NYSE:EOG) at well design. From the Bakken, to the Eagle Ford and Permian it continues to outperform the competition.

The following map courtesy of ShaleMapsPro.com does a good job of illustrating EOG’s exposure in the Eagle Ford.

EagleFord.SeekingAlpha

(Source: Shalemapspro.com)

EOG’s focusing of frac jobs closer to the well bore has provided for much better source rock stimulation (fraccing). Since more fractures are created, there is a greater void in the shale. This means more producing rock has contact with the well. EOG continues to push more sand and fluids in the attempt to recover more resource per foot. To evaluate production, it must be broken into days over 6 to 12 months. To evaluate well design, locations must be close to one another and by the same operator. This consistency allows us to see advantages to well design changes. Lastly, we compare marginal acreage it is no longer working to the high-grading program. This is how operators are spending less and producing more.

EOG is working in the Antelope field of northeast McKenzie County. This is Bakken core acreage and considered excellent in both the middle Bakken and upper Three Forks.

(click to enlarge)
(Source: Welldatabase.com)

The center of the above map is the location of both its Riverview and Hawkeye wells. These six wells are located in two adjacent sections. The pad is just west of New Town in North Dakota. Riverview 100-3031H was completed in 6/12. It is an upper Three Forks well. 39 stages were used on an approximate 9000 foot lateral. 5.7 million pounds of sand were used with 85000 barrels of fluids.

(click to enlarge)
(Source: Welldatabase.com)

Date Oil (BBL) Gas ((NYSEMKT:MCF)) BOE
6/1/2012 4,384.00 3,972.00 3972
7/1/2012 27,133.00 15,337.00 15337
8/1/2012 24,465.00 17,223.00 17223
9/1/2012 21,457.00 9,190.00 9190
10/1/2012 18,040.00 12,601.00 12601
11/1/2012 19,924.00 13,366.00 13366
12/1/2012 28,134.00 22,259.00 22259
1/1/2013 15,382.00 12,661.00 12661
2/1/2013 3,429.00 2,451.00 2451
3/1/2013 15,242.00 22,774.00 22774
4/1/2013 15,761.00 8,479.00 8479
5/1/2013 13,786.00 18,372.00 18372
6/1/2013 14,485.00 18,555.00 18555
7/1/2013 15,668.00 27,250.00 27250
8/1/2013 12,084.00 23,876.00 23876
9/1/2013 13,841.00 46,815.00 46815
10/1/2013 11,388.00 45,800.00 45800
11/1/2013 2,711.00 10,533.00 10533
12/1/2013 0 0 0
1/1/2014 5,953.00 35 35
2/1/2014 11,368.00 20,851.00 20851
3/1/2014 8,784.00 11,179.00 11179
4/1/2014 5,607.00 8,479.00 8479
5/1/2014 4,727.00 5,663.00 5663
6/1/2014 8,359.00 12,726.00 12726
7/1/2014 8,799.00 22,957.00 22957
8/1/2014 7,958.00 31,621.00 31621
9/1/2014 7,218.00 44,318.00 44318
10/1/2014 3,778.00 14,058.00 14058
11/1/2014 3,701.00 9,951.00 9951
12/1/2014 6,612.00 18,435.00 18435
1/1/2015 6,181.00 24,142.00 24142
2/1/2015 3,517.00 10,722.00 10722
3/1/2015 5,218.00 24,175.00 24175
4/1/2015 4,275.00 24,233.00 24233

(Source: Welldatabase.com)

Riverview 100-3031H was a progressive well design for 2012. It produced well. To date it has produced 379 thousand bbls of crude and 615 thousand Mcf of natural gas. This equates to $24 million in revenues. Over the first 360 days (using the true number of production days) it produced 240,036 bbls of crude. The month of December 2013, this well was shut in for the completion of an adjacent well. There was a return to production but no significant jump in production from pressure generated by the new locations. This well declined 42% over 12 months. This is much lower than estimates shown through other well models. The next year we see a 35% decline. 10 months later we see an additional decline of approximately 55%. The decline curve of a well is very specific to geology and well design. Keep in mind averages are just that, and do not provide specific data. These averages should not be used to evaluation acreage and operator as there are wide average swings. Also, averages are generally over a long time frame. Production in the Bakken began in 2004 (first horizontal well completed). Wells in 2004 produce nothing like wells today. Updated averages based on year (IP 360) are more useful. Riverview 100-3031H was part of a two well pad. A middle Bakken well was also completed.

Riverview 4-3031H began producing a month after Riverview 100-3031H. It was a 38 stage 9000 foot lateral. 4.3 million lbs of sand were used and 69000 bbls of fluids.

(click to enlarge)
(Source: Welldatabase.com)

The Riverview and Hawkeye wells analyzed in this article were drilled in a southern fashion.

Date Oil Gas BOE
7/1/2012 20,529.00 12,537.00 12537
8/1/2012 16,553.00 16,903.00 16903
9/1/2012 17,096.00 10,148.00 10148
10/1/2012 23,197.00 17,914.00 17914
11/1/2012 20,122.00 14,402.00 14402
12/1/2012 27,340.00 33,217.00 33217
1/1/2013 16,044.00 24,394.00 24394
2/1/2013 4,267.00 4,946.00 4946
3/1/2013 27,516.00 26,219.00 26219
4/1/2013 20,792.00 7,940.00 7940
5/1/2013 17,516.00 35,948.00 35948
6/1/2013 15,457.00 50,500.00 50500
7/1/2013 13,480.00 50,807.00 50807
8/1/2013 11,254.00 42,300.00 42300
9/1/2013 9,319.00 40,341.00 40341
10/1/2013 8,559.00 33,116.00 33116
11/1/2013 2,190.00 40 40
12/1/2013 0 0 0
1/1/2014 1,124.00 11 11
2/1/2014 5,271.00 81 81
3/1/2014 8,931.00 9,827.00 9827
4/1/2014 5,469.00 7,940.00 7940
5/1/2014 4,807.00 5,748.00 5748
6/1/2014 8,522.00 13,819.00 13819
7/1/2014 7,982.00 17,983.00 17983
8/1/2014 7,169.00 26,755.00 26755
9/1/2014 5,750.00 22,586.00 22586
10/1/2014 1,349.00 3,194.00 3194
11/1/2014 6,495.00 15,947.00 15947
12/1/2014 6,442.00 18,806.00 18806
1/1/2015 5,840.00 22,126.00 22126
2/1/2015 4,171.00 18,682.00 18682
3/1/2015 4,221.00 18,539.00 18539
4/1/2015 3,878.00 19,725.00 19725

(Source: Welldatabase.com)

Riverview 4-3031H has produced 361 thousand bbls of crude and 657 thousand Mcf of natural gas. It under produced Riverview 100-3031H, but this is consistent with well design. 360 day production totaled 237,735 bbls of oil. We do not know if the Three Forks is a better pay zone than the middle Bakken as the well design was not consistent. Most operators have reported better results from the middle Bakken. The Three Forks well used one more stage (less feet per stage should mean better fracturing). It also used significantly more sand and fluids. Either way both wells were good results. Riverview 4-3031H only declined approximately 36% in a comparison of the first month to month 12. This was 7% better than 100-3031H. It declined another 41% in year two on a month to month comparison. This was 6% greater. 56% was seen when compared to adjusted production for 5/15. The Three Forks well declines slower in later production than 4-3031H. This may be due to well design. The well with more stages, proppant and fluids continues to out produce the Bakken well. It is possible the source rock is better. There are many other variables to look at, but this data provides why EOG continues to push ahead with more complex locations.

In September of 2012, EOG drilled its next well in this area. Hawkeye 100-2501H is a 13700 foot lateral targeting the upper Three Forks. It is a 47 stage frac. 14 million pounds of sand were used with 158000 bbls of fluids.

(click to enlarge)
(Source: Welldatabase.com)

Of the three pads, this well is located in the center. It was an interesting design, given the length of the lateral.

Date Oil Gas BOE
9/1/2012 21,959.00 444 444
10/1/2012 54,927.00 155 155
11/1/2012 47,557.00 57,300.00 57300
12/1/2012 55,367.00 92,144.00 92144
1/1/2013 33,396.00 55,877.00 55877
2/1/2013 22,100.00 32,810.00 32810
3/1/2013 36,631.00 57,544.00 57544
4/1/2013 29,075.00 32,696.00 32696
5/1/2013 22,210.00 33,351.00 33351
6/1/2013 17,544.00 25,794.00 25794
7/1/2013 15,872.00 23,600.00 23600
8/1/2013 19,647.00 28,746.00 28746
9/1/2013 15,486.00 22,352.00 22352
10/1/2013 21,325.00 31,678.00 31678
11/1/2013 6,418.00 9,214.00 9214
12/1/2013 0 0 0
1/1/2014 0 0 0
2/1/2014 0 0 0
3/1/2014 29,699.00 23,822.00 23822
4/1/2014 39,782.00 32,696.00 32696
5/1/2014 35,267.00 61,543.00 61543
6/1/2014 27,554.00 49,551.00 49551
7/1/2014 7,229.00 12,565.00 12565
8/1/2014 31,155.00 98,086.00 98086
9/1/2014 12,617.00 32,742.00 32742
10/1/2014 2 4 4
11/1/2014 7,769.00 15,996.00 15996
12/1/2014 15,487.00 49,147.00 49147
1/1/2015 4,427.00 9,918.00 9918
2/1/2015 9,344.00 20,654.00 20654
3/1/2015 8,459.00 25,171.00 25171
4/1/2015 7,235.00 24,752.00 24752

(Source: Welldatabase.com)

Hawkeye 100-2501H had some excellent early production numbers. From that perspective, it is one of the best wells to date in the Bakken. It has already produced 655,000 bbls of crude and 960,000 Mcf of natural gas. It has revenues in excess of $42 million to date. This includes roughly four non-producing or unproductive months. Crude production over the first 360 days was 389,835 bbls. Over the first 12 months, this well produced crude revenues in excess of $23 million. Decline rates were higher, as the first full month of production declined 65% over the first year. This isn’t important as early production rates were some of the highest seen in North Dakota. It is important to note, decline rates are emphasized but higher pressured wells may deplete faster depending on choke and how quickly production is propelled up and out of the wellbore. Any well that produces very well initially will have higher decline rates, but this does not lessen the value of the well. This specific well is depleting faster, but no one is complaining about payback times well under a year. Decline rates decrease significantly in year two at 11%. This well saw a marked increase in production when adjacent wells were turned to sales. The additional pressure associated with well communication increased production from 20,000 bbls/month to 35,000 bbls/month on average. This occurred over a 6 month period.

(click to enlarge)
(Source: Welldatabase.com)

Hawkeye 102-2501H was the fourth completion. This 14,000 foot 62 stage lateral targeted the upper Three Forks. It used 14.5 million pounds of sand and 164,000 bbls of fluids.

Date Oil Gas BOE
1/1/2013 18,486.00 41 41
2/1/2013 27,120.00 8,705.00 8705
3/1/2013 39,702.00 15,748.00 15748
4/1/2013 17,714.00 30,501.00 30501
5/1/2013 41,368.00 57,489.00 57489
6/1/2013 26,602.00 34,399.00 34399
7/1/2013 0 0 0
8/1/2013 133 0 0
9/1/2013 0 0 0
10/1/2013 0 0 0
11/1/2013 0 0 0
12/1/2013 0 0 0
1/1/2014 5,163.00 6,403.00 6403
2/1/2014 41,917.00 74,353.00 74353
3/1/2014 36,439.00 18,111.00 18111
4/1/2014 19,477.00 30,501.00 30501
5/1/2014 26,388.00 43,071.00 43071
6/1/2014 27,480.00 49,456.00 49456
7/1/2014 14,529.00 33,072.00 33072
8/1/2014 24,542.00 62,753.00 62753
9/1/2014 17,613.00 53,460.00 53460
10/1/2014 17,451.00 66,544.00 66544
11/1/2014 9,634.00 33,366.00 33366
12/1/2014 16,338.00 76,547.00 76547
1/1/2015 11,450.00 65,277.00 65277
2/1/2015 8,971.00 50,919.00 50919
3/1/2015 3,177.00 14,820.00 14820
4/1/2015 6,495.00 13,616.00 13616

(Source: Welldatabase.com)

It has produced 458,000 bbls of crude and 839,000 Mcf to date. This equates to roughly $30 million over well life. 360 day production was 394,673 bbls of crude. Production was interesting as initial production was outstanding. The big production numbers were hindered as many of the early months had missed production days. We don’t know if there were production problems, but do know the well was shut when adjacent wells were turned to sales. Production was over 1000 bbls/d over the first six months. It was shut in for another six months. After this production jumped, but this is misleading. Given the fewer days of production per month, there wasn’t much of an increase when the new wells were turned to sales. The decline over the first year on a monthly basis is 20%. The second year is much greater at 80%. We have seen recent production decrease significantly, and is something to watch. Lower decline rates initially are more important. This is because production rates are higher. It equates to greater total production.

Hawkeye 01-2501H was completed in January of 2013.

(click to enlarge)
(Source: Welldatabase.com)

It is a 64 stage, 15000 foot lateral targeting the middle Bakken. This well used 172,000 bbls of fluids and 15 million pounds of sand.

Date Oil Gas BOE
1/1/2013 18,792.00 43 43
2/1/2013 30,211.00 13,879.00 13879
3/1/2013 42,037.00 17,648.00 17648
4/1/2013 17,433.00 36,881.00 36881
5/1/2013 38,754.00 63,501.00 63501
6/1/2013 28,602.00 48,817.00 48817
7/1/2013 0 0 0
8/1/2013 134 1 1
9/1/2013 0 0 0
10/1/2013 0 0 0
11/1/2013 0 0 0
12/1/2013 0 0 0
1/1/2014 6,311.00 7,186.00 7186
2/1/2014 43,713.00 74,099.00 74099
3/1/2014 39,156.00 18,492.00 18492
4/1/2014 23,408.00 36,881.00 36881
5/1/2014 21,681.00 33,498.00 33498
6/1/2014 28,502.00 51,543.00 51543
7/1/2014 18,795.00 45,017.00 45017
8/1/2014 25,512.00 58,837.00 58837
9/1/2014 20,522.00 60,662.00 60662
10/1/2014 19,137.00 68,576.00 68576
11/1/2014 12,093.00 37,043.00 37043
12/1/2014 16,587.00 45,980.00 45980
1/1/2015 14,246.00 62,819.00 62819
2/1/2015 9,220.00 35,931.00 35931
3/1/2015 3,617.00 6,634.00 6634
4/1/2015 13,702.00 42,551.00 42551

(Source: Welldatabase.com)

It has produced 492,170 bbls of crude and 866,520 Mcf of natural gas. 360 day production was 412,072 bbls of oil.

(click to enlarge)
(Source: Welldatabase.com)

This is an excellent well, but the location of focus is Hawkeye 02-2501H. It was completed last in this group. This well provides the link between changes in well design to production improvements.

Date Oil Gas BOE
12/1/2013 3,022.00 6,533.00 6533
1/1/2014 37,385.00 75,940.00 75940
2/1/2014 30,066.00 58,949.00 58949
3/1/2014 22,876.00 50,690.00 50690
4/1/2014 26,703.00 43,926.00 43926
5/1/2014 31,987.00 55,124.00 55124
6/1/2014 27,777.00 47,166.00 47166
7/1/2014 31,500.00 50,279.00 50279
8/1/2014 51,709.00 99,583.00 99583
9/1/2014 43,292.00 98,069.00 98069
10/1/2014 40,143.00 98,927.00 98927
11/1/2014 24,064.00 50,495.00 50495
12/1/2014 31,488.00 99,684.00 99684
1/1/2015 27,087.00 94,621.00 94621
2/1/2015 22,207.00 94,490.00 94490
3/1/2015 22,590.00 125,634.00 125634
4/1/2015 17,707.00 94,910.00 94910

(Source: Welldatabase.com)

The production numbers are significant. In less than a year and a half, it has produced 490,000 bbls of crude and 1.25 Bcf of natural gas. Revenues to date are $33.2 million. Its 360 day crude production was 427,663 bbls. The production is impressive but the decline curve is more important. This Hawkeye well has a steady production rate with only a slight decline. This is where the analysts may be getting it wrong, as decline curves change significantly by area and well design. What EOG has done is not only increased production significantly, but also flattened the curve. Initial production is interesting as we don’t see peak production until nine months. This means our best month is August of 2014, and not the first full month. When we analyze the production after one full year of production, there is no drop off.

This 12800 foot 69 stage lateral is a very good middle Bakken design. EOG decided to pull back some of the lateral length. There are several possible reasons for this. We think it is possible EOG has discovered it was having difficulty in getting proppant to the toe of the well. But this is why operators test the length. More importantly, the increase in stages in conjunction with a shorter lateral provides for shorter stages. This means the operator will probably do a better job of stimulating the source rock. This well also used massive volumes of fluids and sand. 460,000 bbls of fluids were used with over 27 million lbs of proppant. I don’t normally break down the types of sand, as it can be trivial to some but in this case I have as the design seems somewhat unique. This well used approximately 16 million lbs of 100 mesh sand, 7 million lbs of 30/70 and 4 million 40/70. The large volumes of mesh sand are interesting. It would seem EOG is trying to push the finest sand deep into the fractures to maintain deeper shale production.

Well Date Lateral Ft. Stages Proppant Lbs. Fluids Bbls. 12 mo. Oil Production Bbls. Production/Ft.
Riverview 100-3031H 6/12 9,000 39 5.7M 85,000 240,036 26.67
Riverview 4-3031H 7/12 9,000 38 4.3M 69,000 237,735 26.42
Hawkeye 100-2501H 9/12 13,700 47 14M 158,000 389,835 28.46
Hawkeye 102-2501H 1/13 14,000 62 14.5M 164,000 394,673 28.19
Hawkeye 01-2501H 1/13 15,000 64 15M 172,000 412,072 27.47
Hawkeye 02-2501H 12/13 12,800 69 27M 460,000 427,663 33.41

I completed the above table for several reasons. The first was to show well design’s effect on one year total production. We used 360 days as a base. We didn’t use 12 months as that will skew data, as some wells don’t produce every day of every month. Wells are shut in for service or more importantly when new production from adjacent locations are turned to sales. So these are a specific number of days and not estimates. We also broke down production per foot of lateral. This may be more important than any other factor. Production per well is important, but lateral length is a key as it shows how well the source rock was stimulated. In reality, production per foot matters more at longer lateral lengths. Many operators don’t like to do laterals longer than 10,000 feet, as production per foot decreases sharply. When looking at well production data, it is obvious that production per foot suffers as the toe of the lateral gets farther from the vertical.

There are several other ETFs that focus on U.S. and world crude prices:

  • iPath S&P Crude Oil Total Return Index ETN (NYSEARCA:OIL)
  • ProShares Ultra Bloomberg Crude Oil ETF (NYSEARCA:UCO)
  • VelocityShares 3x Long Crude Oil ETN (NYSEARCA:UWTI)
  • ProShares Ultrashort Bloomberg Crude Oil ETF (NYSEARCA:SCO)
  • U.S. Brent Oil ETF (NYSEARCA:BNO)
  • PowerShares DB Oil ETF (NYSEARCA:DBO)
  • VelocityShares 3x Inverse Crude Oil ETN (NYSEARCA:DWTI)
  • PowerShares DB Crude Oil Double Short ETN (NYSEARCA:DTO)
  • U.S. 12 Month Oil ETF (NYSEARCA:USL)
  • U.S. Short Oil ETF (NYSEARCA:DNO)
  • PowerShares DB Crude Oil Long ETN (NYSEARCA:OLO)
  • PowerShares DB Crude Oil Short ETN (NYSEARCA:SZO)
  • iPath Pure Beta Crude Oil ETN (NYSEARCA:OLEM)

All six wells had fantastic results. The first two Riverview wells are still considered sand heavy fracs and produced almost a quarter of a million barrels of oil. This does not include natural gas in the estimates, but EURs for these wells are approximately 1200 MBo. We don’t put much emphasis on EURs other than an indicator of how good production is in comparison. Since locations will produce from 35 to 40 years, we are more inclined to emphasize one year production. Although the Hawkeye wells drilled on 9/12 and 1/13 didn’t show a large uptick in production per foot, it is still quite impressive considering the lateral length. Overall production uplift was exceptional, and these wells produce decent payback times at current oil price realizations.

There is no doubt this area has superior geology. It is definitely a core area, but may not be as good as Parshall field. Because of this, we know other areas would not produce as well, but still it provides a decent comparison for the upside to well design. Geology is still key and this is probably why EOG recently drilled a 15 well pad in the same general area. These wells are still in confidential status, so we do not know the outcome. Given the results in this area, these wells could be very interesting. The most important reason to focus on these Mega-Fracs is repeatability. If EOG can do this, so can other operators. Our expectations are many operators will be able to complete wells this good within the next 12 to 24 months. If this occurs we could see production maintained at much lower prices and fewer completions.

Oil Markets: Sentiment And Lame Thinking Are Currently In The Driver’s Seat

Summary

  • The oil markets have hit multi-year lows on unsubstantiated theories about a supply glut and fears of cooling demand.
  • Meanwhile, the geopolitical risks around the world have oddly disappeared in H2 2015.
  • Nevertheless, the facts prove that the real thing is way too far from evaporating geopolitical risks or a material deterioration of the global supply-demand fundamentals that can justify a slump.
  • The unprecedented downward pressure on oil prices is a headline-driven and sentiment-driven event.
  • The oil price will definitely rise significantly in 2015.

Introduction

The stock market will always give the investors a chance to make a blunder, especially for those who allow emotions to overrule facts and factual thinking. The emotional blunders are part of the game in the stock market. And if you run your portfolio based on lame-thinking and emotion, you will most likely follow the herd mentality and sell at the wrong time, because lame-thinking and emotion will always cloud your judgment.

Things get worse for your portfolio when you allow the analysts and the opinion makers who show up daily on CNBC and Bloomberg, to tell you what is really going on with a sector. To me, many of these guys are not just incompetent. To me, they are dangerous because their advice can ruin your wealth in a record time. It is easy to throw out statements without backing them up with any math, and it is easy to make overly simplistic interpretations of the global supply/demand dynamics. “So easy even a caveman can do it,” as GEICO’s commercial states.

And as clearly illustrated by the following charts, insanity and panic are currently hovering over the oil markets, due to the fact that many incompetent oil prognosticators have flooded the media with their lame opinions over the last months. For instance, the charts for the bullish ETFs (NYSEARCA:USO), (NYSEARCA:DBO) and (NYSEARCA:OIL) that track WTI are below:

(click to enlarge)

and below:

(click to enlarge)

and below:

(click to enlarge)

This is the chart for the bullish ETF (NYSEARCA:BNO) that tracks Brent:

(click to enlarge)

And the charts for the leveraged bullish ETFs (NYSEARCA:UCO) and (NYSEARCA:UWTI) are below:

(click to enlarge)

and below:

(click to enlarge)

All these bullish ETFs have returned back to their 2010 levels amid irrational fears for oversupply. But, these fears are completely unsubstantiated and they do not justify at all the sentiment-driven slump in the oil price over the last 4 months.

Andre Kostolany and The Oil Price

Obviously, all these sellers ignore Andre Kostolany who has said that:

“Imagine a man walking, one step at a time, on a country lane for a mile or so. He is accompanied by his dog, which follows the man like a dog follows his master: one step forward, one step backward. While the man is walking slowly, his dog is jumping around back and forth. There will be times when the man is ahead; he will wait for the dog and then there will be times when the dog is ahead and the dog will wait. In this example, the man represents the economy, and the dog the stock market.”

And for those who do not know Andre Kostolany, Kostolany is a stock market legend. Kostolany’s great quote describes what is going on with the oil price these days. The dog (oil price) currently is behind the man (oil supply/demand dynamics) and will catch him sooner rather than later.

In other words, I am a strong believer that Brent is not going to stay below $75/barrel for long, and the dubious Thomas are welcome to read the facts that will propel Brent higher than its current levels by early 2015.

What They Were Telling You In 2013 And H1 2014

Back in 2013 and H1 2014, when Brent was trading around $110/bbl, the analysts and several other opinion makers were calling for oil to hit $150 per barrel. Let’s see some more details and the reasons behind these calls:

1) In H1 2013, the U.S. Department of Energy reported that China overtook the U.S. as the world’s largest net oil importer. That was the time when a report from the Paris-based OECD (Organization for Economic Co-Operation and Development) came out and noted:

“Based on plausible demand and supply equations, there is a risk that prices could go up to anywhere between $150 and $270 per barrel in real terms by 2020, depending on the responsiveness of oil demand and supply and on the size of the temporary risk premium embedded in current prices due to fears about future supply shortages.”

OECD also noted in that report:

“There is a strong price increase needed despite this new oil production coming on stream.”

2) In H1 2013, Energy Aspects, an energy research consultancy, noted as linked above “All estimates point to Asian demand propelling growth.” It also said that the implications of the U.S. shale-oil boom could be overstated for the rest of the world if demand from Asia keeps up.

3) In H1 2013, some analysts from Goldman Sachs wrote that Brent crude oil prices could rise to $150 per barrel in H2 2013 because:

“Despite the boom in U.S. shale gas, the oil price remains high, which he attributed primarily to sanction-related supply disruptions in Iran. Trying to compensate for this, Saudi Arabia has already increased its oil production to a 30-year high this year.”

Mr. Currie added that:

“While global oil demand has increased at a slower pace, it is still higher than the production increases in non-OPEC countries. Upside risks for oil prices include low inventory levels, limited OPEC spare capacity, and geopolitical risks which are likely near an all-time high with production in a very large number of countries at risk, including Egypt, Iran, Iraq, Libya, Nigeria, Sudan, Syria and Venezuela. Europe still faces economic and policy headwinds, China just experienced a significant food inflation surprise (and the livestock impacts from last year’s agriculture price spike will only be felt this year) and the US still faces risks from the debt ceiling debate, the automatic spending cuts (or “sequestration”) and impending tax increases.”

4) In H2 2013, when Brent was still around $115/bbl, the French bank Societe Generale said:

“Brent crude is likely to rise towards $125 a barrel if the West launches airstrikes against Syria, and could go even higher if the conflict spills over into the rest of the Middle East.”

5) As linked above, another report from JBC Energy in Vienna said in H2 2013:

“Current developments such as low spare capacity in Saudi Arabia, stockpiles falling in the U.S., disappointing supply developments around the world and signs of an improving global economy are pointing to tighter markets.”

6) In late 2013, the analysts at the National Bank of Abu Dhabi in UAE noted:

“Average oil price was $112 per barrel in 2012. The average price of crude oil is forecast at $105 per barrel in 2013, $101 per barrel in 2014 and $100 per barrel in 2015. The base case is for oil prices to soften mildly, but remain close to $100 per barrel through 2018. Thereafter, prices rise by a few dollars each year in this scenario.”

7) Even a few months ago in June 2014, the analysts were telling you:

A) This is from Nordea Bank (OTCPK:NRBAY):

“If Iraq, accounting for 3.7% of the world’s total oil production, suffers a serious disruption to its oil supplies, we will see a sharp upswing in oil prices as the OPEC effective spare capacity buffer is low, making the global oil market highly sensitive to further supply disturbances. If Iraqi oil production would fall back to the low levels seen during the invasion of Iraq in 2003, oil prices could easily rise by up to $30 a barrel as this would push the global spare capacity back to the lows when oil prices reached $150 a barrel in July 2008. High oil prices would put the world economic recovery at risk.”

B) This is from PVM Oil Associates:

“The deteriorating situation in Iraq could be the source of an oil price and therefore a financial shock should be sending economic-growth forecasters back to the drawing board. There can be no doubt that if Iraq’s southern oil operations are impacted Brent could reach $125 a barrel and beyond. Saudi Arabia may have 2 million barrels a day of capacity it can turn on reasonably quickly but that leaves no spare capacity margin.”

C) This is from Commerzbank (OTCPK:CRZBY):

“It is hard to imagine that the oil production in northern Iraq will return to the market in the foreseeable future. So far, oil production in the south of Iraq, which accounts for 90% of Iraq’s oil exports, has been unaffected by the fighting in the north and center of the country. However, the sharp price rise in the last two days shows that this oil supply is no longer viewed as secure, either. Without the oil production from the south of Iraq, the market would be stripped of an estimated 2.5 million barrels per day.”

D) This is from the research consultancy Energy Aspects:

“Look at any forecast, they are calling for Iraqi production to be around 7-8 million barrels a day by 2018/2020 for oil prices to not rise substantially. And I think that’s the key, because that’s not going to happen. If this is contained within Iraq that’s one thing, but there’s a very different implication if it becomes a bigger regional conflict. That’s the biggest problem. Iraq’s at the heart of this big oil-producing region.”

What They Are Telling You In H2 2014

Let’s see now what the analysts and several other oil experts have been telling you lately:

1) In October 2014, Goldman Sachs slashed its 2015 oil price forecast. Goldman sees Q1 2015 WTI crude at $75/bbl versus $90/bbl previously and Q1 2015 Brent at $85/bbl versus $100/bbl previously. The U.S. investment bank said rising production will outstrip demand, joining other oil analysts who predict consumption will be dented by slower global economic growth and lead to a supply glut.

2) Other analysts who joined the bearish party lately, predict that the bear market in crude will continue with prices falling as low as $50 a barrel, in part because the global economy is slowing, pushing supply levels higher.

3) In late October 2014, fellow newsletter editor Dennis Gartman showed up and implied that oil could go to $40-$50 per barrel because among others, Lockheed Martin (NYSE:LMT) was working on a compact fusion reactor that could be ready within 10 years. He said:

“Fusion is going to be the great nuclear power of the next 150 years. And finally, we are driving less and less. We are using so much less gasoline than we ever have, in global terms, in national terms, in per capital terms. All of those things, I think, are going to be weighing heavily on crude oil. And where could it go? A lot lower, a lot lower.”

So within ten years from now, we will fit a nuclear fusion reactor on the back of our cars dumping our gas tanks. Let Star Trek come to life! Obviously, Gartman’s thesis also implies that Star Trek’s high-tech, innovative and game-changing tools will be on clearance, so all the people from China and India to Africa and America will not afford to overlook this irrationally cheap nuclear fusion reactor. I don’t even understand why an investor can take Gartman’s approach on oil seriously.

4) The technical traders also showed up a few weeks ago calling for $40/bbl, based on the following chart:

(click to enlarge)

2013/H1 2014 vs. H2 2014: No Major Fundamental Change While Geopolitical Risks Deteriorate

According to Forbes, these are the world’s biggest oil consumers today:

1) United States.

2) China.

3) Japan.

4) India.

5) Euro area.

As also shown in the previous paragraph, the calls in 2013 and H1 2014 for $150/bbl were based on the geopolitical tensions in the Middle East and the expectations about global growth with a focus on demand from the growing Asian markets, which are high in the list with the world’s biggest oil consumers.

And the facts below prove that nothing has changed over the last six months to justify a drop of 35% in the oil price that has occurred lately. In contrast, the geopolitical risks in the Middle East have deteriorated, and the security situation both in Iraq and in Libya has worsened recently. Even International Monetary Fund [IMF] admits that the geopolitical risks have worsened since H1 2014, according to its latest report.

Also, the world’s biggest oil consumers are growing at rates that either are in line with 2013 rates or exceed expectations. There is nothing to indicate that global supply and demand imbalance has fundamentally changed in the past six months. There is just too much speculation, emotion, panic and short-term lame thinking that have been used to determine the value of the oil price lately, and this slump in oil prices is clearly a result of sentiment and emotion.

Let’s proceed now with the facts:

1) Geopolitical risks deteriorate primarily due to ISIS, Iran and Libya: The extremist Islamic State of Iraq and Syria (ISIS) is still there, and the U.S. military and its allies hit ISIS forces with 15 air strikes in Iraq and Syria during a three-day period, The U.S. Central Command revealed a couple of days ago. Thirteen attacks were carried out in Iraq since last Wednesday and two more targeted Islamic State in Syria.

Meanwhile, ISIS keeps advancing in Iraq and Syria, after seizing Iraq’s second largest city Mosul on June 10th. The attacks have been escalating since 2013 and H1 2014, while American, British and Syrian soldiers were beheaded in October 2014 and November 2014, which is confirmed by Obama Administration. Apparently, there is no improvement compared to the situation in 2013 or H1 2014.

Furthermore, world powers failed to reach a nuclear agreement with Iran last week and extended talks for seven months. This means that the Western economic sanctions are not going to be lifted anytime soon, freezing the ability of Iranian banks to conduct international transactions while Iran’s daily oil export restrictions will remain too. This also means that Iran will continue working on its nuclear program by the summer of 2015, impacting negatively the destabilization risk in the region. And there is obviously no improvement compared to the situation in 2013 or H1 2014.

Also, there is no risk improvement in Libya compared to the situation in 2013 or H1 2014. In late August 2014, Libya’s ambassador to the United Nations warned of “full-blown civil war,” if the chaos and division in the North African country continue.

Libya currently has two competing parliaments and governments. The first government and elected House of Representatives relocated to Tobruk a few months ago after an armed group from the western city of Misrata seized the capital Tripoli and most government institutions, as well as the eastern city of Benghazi. The rival previous parliament remains in Tripoli and is backed by militias.

And just a couple of weeks ago, Libya’s political strife intensified as the rival government that has seized the capital took control of Libya’s largest oilfield (El Sharara), according to Reuters. Libya’s oil production rose above 900,000 bopd in September 2014, sharply above lows of 100,000 bopd in June 2014, but it has already fallen to around 500,000 bopd at most, as a recovery in Libya has faltered so far, according to Reuters. This translates into a material drop of approximately 400,000 bopd from Libya only.

2) GDP Growth Rates: Let’s take a look now at the GDP growth rates of the world’s biggest oil consumers:

A) United States: According to the latest news of September 2014, the U.S. economy grew 4.6% in Q2 2014, exceeding earlier estimates. And according to the latest news of November 2014, the U.S. economy grew 3.9% in Q3 2014, exceeding once again the consensus estimate of 3.3%, as illustrated below:

(click to enlarge)

B) China: China grew 7.6% in 2013 and grows 7.4% (on average) to date, as shown below:

(click to enlarge)

Also, China’s GDP per capita continues growing in 2014 at the same pace it has been growing over the last couple of years, as illustrated below:

(click to enlarge)

On top of that, the Chinese central bank initiated an easing cycle just a few weeks ago. How can a serious investor ignore this initiative that will have material effects on China’s future growth and China’s oil consumption of course?

C) Japan: The Japanese economy grew in Q1 2014 and contracted in Q2 and Q3 2014, as illustrated below:

(click to enlarge)

But on average, Japan grew 1.52% in 2013 and grew 0.89% in 2014 too, based on the three quarterly GDP figures to date.

Additionally, Japan’s GDP per capita continues growing in 2014 compared to 2013, as illustrated below:

(click to enlarge)

D) India: As shown below, the Indian economy grew 4.5% in 2013:

(click to enlarge)

That was the time when the analysts were saying that these GDP numbers were below their expectations. Please see some analysts’ and officials’ statements about India’s GDP growth from late 2013:

i) “There is no light at the end of the tunnel visible in India’s GDP release.”

ii) “It was slightly below expectations but I feel the overall growth rate of 4.9% would be achieved this year (2014)” said C. Rangarajan, Chairman of the Prime Minister’s Economic Advisory Council.

iii) “These numbers clearly show that attaining a growth rate of 4.9% in 2014 is not possible.”

That was also the time when Brent was around $110/bbl and all the oil prognosticators were projecting $150/bbl, as shown in the previous paragraph.

However, the Indian economy picked up steam and rebounded to a 5.7% rate in Q2 2014 from 4.6% in Q1 2014, led by a sharp recovery in industrial growth and gradual improvement in services.

And under the Modi government and thanks to a series of fundamental economic reforms, the Indian economy continued its growth and grew 5.3% in Q3 2014, as illustrated below:

(click to enlarge)

Needless to mention that these GDP rates in Q2 2014 and Q3 2014 were well above the analysts’ expectations.

Additionally, India’s GDP per capita continues rising in 2014 compared to 2013, as illustrated below:

(click to enlarge)

And according to yesterday’s news from Reuters, Indian factory activity expanded at its fastest pace in nearly two years in November 2014. The HSBC Manufacturing Purchasing Managers’ Index (PMI) rose to 53.3 in November 2014 from 51.6 in October 2014, its highest since February 2013, and the thirteenth consecutive month of expansion in activity. The analysts had expected manufacturing activity to lose some steam and predicted the index would fall to 51.2.

On top of that, India overtook Japan as the world’s third-biggest crude oil importer in 2013 and the U.S. Energy Information Administration [EIA] projects that India will become the world’s largest oil importer by 2020.

E) Europe: Europe continues growing in 2014 albeit in a slow rate, as illustrated below:

(click to enlarge)

But the current slow growth in Europe was there in 2013 too. In fact, Europe has been limping forward for years and this is nothing new, as clearly illustrated at the previous chart.

The Half-Truths And The Peak Oil

Given the fact that neither the geopolitical risks have declined since H1 2014 nor the average GDP growth rates in the world’s biggest oil consumers have dropped compared to 2013, the oil bears had to discover something else to strengthen their lame approach to oil and the supposedly supply glut.

Therefore, it does not surprise me the fact that I have seen the chart below more than 20 times in numerous online articles over the last weeks, given also that there are always willing authors who behave like parrots repeating what they hear:

The thing is that this chart itself tells you half-truths for the following three reasons that you will not find all together in any of the recent bearish articles about oil:

1) This chart above compares apple to oranges. It compares Saudi’s conventional production with U.S. oil production which is primarily a result of drilling unconventional shale wells that peter out quickly. The gap between the extraction cost in Saudi Arabia and the U.S. is approximately $60/bbl. Extracting oil from shale costs $60 to $100 a barrel, compared with $25 a barrel on average for conventional supplies from the Middle East, according to the International Energy Agency [IEA].

In other words, new oil is not cheap and the rising oil production in the U.S. over the last couple of years has been conditional upon the high oil price. Most of the wave of the U.S. production is currently unprofitable and the current low oil price discourages new drilling.

2) The U.S. shale players are on a steep rate treadmill because of the high decline rates of the unconventional wells, and an investor must be in denial to not see it.

3) The sweet spots and the spots with high productivity in the main oil basins in the U.S. (Williston, EF, Permian) cover a finite amount of land and eventually the number of the wells at the sweet spots is not infinite. The shale producers say that they have reserves [RLI] for approximately 10 years but this does not mean that their drilling locations are sweet spots.

The shale producers have already drilled in many of the best areas, or sweet spots. Once those areas have been drilled out completely, operators will have to move to more-marginal locations and well productivity will fall precipitously. Meanwhile, the advances in technology cannot make wonders to boost the recovery rates overnight.

As such, it is imperative to keep in mind that the peak oil in the U.S. is not a myth. At the current oil price, the supply of the unconventional oil production in the U.S. will quickly prove self-correcting. Both the oil production and the crude inventories in the U.S. will stall soon and will go into a permanent decline effective H1 2015 as a result of the ongoing reduction in drilling activity, the high depletion rates of the unconventional wells and the finite number of the sweet spots.

In fact, the rapid decline has already started. First, the Energy Information Administration said yesterday U.S. crude-oil supplies declined 3.7 million barrels on the week ended Nov. 28. Analysts surveyed by Platts had expected crude inventories to increase by 380,000 barrels on the week.

According also to today’s news from Seeking Alpha, new permits, which outline what drilling rigs will be doing 60-90 days in the future, showed heavy declines for the first time this year across the top three U.S. onshore fields: the Permian Basin, Eagle Ford and Bakken shale. Specifically, there is an almost 40% decline in new well permits issued across the U.S. in November 2014, with only 4,520 new well permits approved last month, down from 7,227 in October 2014.

These numbers indicate a sizable dent in U.S. production in the not too distant future. Most of that dent will come from the highly leverage players holding lower quality land.

The Oil Sector In 2015 And The Real Estate Analog

The ETFs (NYSEARCA:IYR) and (NYSEARCA:VNQ) measure the performance of the real estate sector of the U.S. equity market and include large-, mid- or small-capitalization companies known as real estate investment trusts (“REITs”). Their charts over the last couple of years are illustrated below:

(click to enlarge)

and below:

(click to enlarge)

All the investors know the fundamental problems behind the slump of the real estate sector in the U.S. a few years ago. Given that no fundamental improvement can take place overnight, it took the real estate sector in the U.S. a few years to recover from its lows in 2009.

I am sure now that many readers wonder why I talk about the real estate sector in an oil-related article. What is the relation between the real estate sector and the oil markets?

I mention this example because I strongly believe that the oil price will recover like the real estate sector has recovered from its bottom over the last three years. But, there is also a big difference here. The recovery of the oil price will be much quicker than the recovery of the real estate sector, given that this slump of the oil price has been driven by lame thinking, arbitrary speculation and sentiment, while having nothing to do with evaporating geopolitical risks around the world or a material deterioration of the global supply-demand fundamentals.

On top of that, there are some additional geopolitical clouds on the horizon that can make oil jump by H1 2015. For instance, the current low oil price has brought many OPEC members to their knees, while the holders of those countries’ sovereign debt are toast as long as oil stays at the current levels. Iran, Iraq, Libya, Algeria and Venezuela are not prepared to withstand low oil prices for long and they are now in serious danger of political upheaval at current prices. According to yesterday’s news from CNBC, the first signs of an escalating social unrest in Venezuela are already there, and things will definitely get worse over the next weeks.

Furthermore, Russia and Saudi Arabia will be anxiously watching the rapid depletion of their sovereign wealth funds, which will make the political situation in these two countries dicey over the next months.

In other words, I obviously agree with Andrew John Hall, who is known as the God of Crude Oil Trading. Although many investors and readers do not know this oil legend, Hall is secure in his view that the price of oil is destined to rise sooner rather than later, mocking those who are convinced that a U.S. shale boom will mean long-term cheap, abundant energy.

My Takeaway

Fellow investors, please educate yourselves for your own benefit. Everyone talks about buying low and selling high, but he often does the opposite. The typical investor often buys high because he feels good. And he sells low because of panic and lame thinking.

Therefore, this is the essence of my investment thesis. This oil price fall is a sentiment-driven slump. This is short term and sentiment-driven noise in the big picture story. Right now, oil has come to the point where it is unloved, which is exactly when you have to expose yourself to the sector. This oil downturn cannot last long and oil will bounce back by early 2015.

On the supply side, there are not any “elephant” conventional discoveries over the last years, and this is why the conventional oil production from the U.S., the North Sea, Mexico, North Africa and the Middle East has been falling over the last years. Cheap and easy oil is gone forever, and the global marginal barrel currently is in the $80 to $90 range.

Due to the current low oil price, oil supplies will become critically tight by early 2015, largely because production leader Saudi Arabia is not able to pump as much extra oil as many people believe. In fact, Saudi oil production has peaked at approximately 10 million bopd over the last years, as illustrated below:

On the demand side, the investors must not ignore that world population keep growing at a satisfactory rate in an energy intensive world, as witnessed by the GDP growth rates and the GDP per capita for the world’s biggest oil consumers mentioned above. As a result, global oil demand continues growing unabated at average of 1 million barrels per year.

Meanwhile, the geopolitical tensions are escalating and the crude oil price is best proxy for geopolitical risk.

After all, how can the investors weather this temporary storm and benefit from this oil price shock? Well, big fortunes will be made to those with the patience and foresight to pick right and hold tight. Just pick quality oil stocks with low key metrics (i.e. EV/EBITDA, EV/Production, EV/Reserves), sit tight, and you are going to do very well given that the strong players will remain and the weak ones will vanish.

For instance, stay far from the heavily indebted companies with a high Net Debt to EBITDA ratio, because many highly leveraged U.S. shale producers will go broke over the next couple of years. The rising tide will not lift all boats. Even if WTI jumps at $85/bbl tomorrow, several U.S. shale oil producers will not avoid bankruptcy while others will be sold for pennies on the dollar. Beggars cannot be choosers.

And now you know why I sent out last Thursday a Market Update to the subscribers of “Nathan’s Bulletin,” urging them to load specific quality picks. And when Brent crests that $90 mark again, they will be glad they did.

https://i0.wp.com/static.seekingalpha.com/uploads/2009/11/11/saupload_world_20in_20oil_lr_shutterstock_4174132.jpg
Comments (149)
 
 
 
  • mike904

    Comments (741) | Send Message

     

    I would be obvious to a garden gnome that any rise in the price of Brendt crude above $115 causes a recession. This has been true ever since 2007. The US cannot afford $4 gasoline.

     

    The reason oil stayed as high as it did was the fact that India and China subsidized it. The fact that China passed the US in imports misses the point. China uses 36mm boe in coal every year. They manufacture 700 million tons of steel versus 40 in the US. This is due largely to $5 trillion in QE. In the process of this absurd borrowing, they have wiped out most of their neighbors.

     

    Earnest and Young estimates that there is 300 million tons of excess steel capacity in the world and China is STILL building new capacity. That 300 million tons is assuming China continues to use 640 million tons internally. Once countries start to protect their steel producers, China is going to collapse. Steel requires 11 BOE of energy per ton. 300 million tons is the equivalent of 10 million BOE of energy per day. If there’s a recession, you could see total energy use drop by 15-20 million BOE per day.

     

    Demand isn’t what people want, demand is what they can pay for. Once the wold starts defaulting on this junk corporate debt, petroleum demand is going to collapse. The last time we went through a shock like this was 1982 and 6 million BPD of demand came of the market. This one is going to be far far worse. You could easily see oil go to $50 and stay there for a decade. According to Evans-Ambrose Prichard, Jim Chanos and Kyle Bass, China is going to collapse.

    4 Dec, 07:50 AMReplyLike7
     
  • Global Investor

    Comments (309) | Send Message

     

    Excellent write up, as usual! Your excerpt below says it all:

     

    ” The recovery of the oil price will be much quicker than the recovery of the real estate sector, given that this slump of the oil price has been driven by lame thinking, arbitrary speculation and sentiment, while having nothing to do with evaporating geopolitical risks around the world or a material deterioration of the global supply-demand fundamentals”.

     

    and this one:

     

    ” In fact, the rapid decline has already started. First, the Energy Information Administration said yesterday U.S. crude-oil supplies declined 3.7 million barrels on the week ended Nov. 28. Analysts surveyed by Platts had expected crude inventories to increase by 380,000 barrels on the week.

     

    According also to today’s news from Seeking Alpha, new permits, which outline what drilling rigs will be doing 60-90 days in the future, showed heavy declines for the first time this year across the top three U.S. onshore fields: the Permian Basin, Eagle Ford and Bakken shale. Specifically, there is an almost 40% decline in new well permits issued across the U.S. in November 2014, with only 4,520 new well permits approved last month, down from 7,227 in October 2014. “

     

    I did not actually expect such big declines so soon. Both declines really surprised me. How long can an investor remain in denial?

    4 Dec, 10:54 AMReplyLike9
     
  • Doug Dallam

    , contributor
    Comments (8116) | Send Message

     

    mike

     

    “China is going to collapse.”

     

    People have been saying that for around, well, forever.

    4 Dec, 11:27 AMReplyLike17
     
  • IncomeYield

    Comments (1847) | Send Message

     

    The opposite could happen.

     

    How many people world-wide have been sitting on the proverbial sidelines at $100+ oil? Waiting to start or expand a biz. Waiting to buy a car?

     

    All of a sudden, poof, 40% off on the COGS!
    Possibly a big demand shock coming.

    4 Dec, 12:34 PMReplyLike5
     
  • bettheranch

    Comments (19) | Send Message

     

    “How many people world-wide have been sitting on the proverbial sidelines at $100+ oil? Waiting to start or expand a biz. Waiting to buy a car?”

     

    Answer: None.

    4 Dec, 12:42 PMReplyLike5
     
  • IncomeYield

    Comments (1847) | Send Message

     

    Exactly, “None”, or did you mean “Zero”?

    4 Dec, 12:55 PMReplyLike0
     
  • Josh Young

    , contributor
    Comments (704) | Send Message

     

    Great article. I like that you incorporated the drilling permit drop, seen here: http://seekingalpha.co…

    4 Dec, 02:41 PMReplyLike1
     
  • bettheranch

    Comments (19) | Send Message

     

    Zero. Zip. Nada.

     

    Most people (Americans) can’t even tell you who Ben Franklin was, much less tell you the price of oil.

     

    They can’t even remember how much their last tattoo cost them, or their boyfriend.

    4 Dec, 06:08 PMReplyLike12
     
  • trader57

    Comments (253) | Send Message

     

    GI, if those numbers for well permits are not seasonally adjusted, then it’s possible that a big part of that drop is caused by seasonal factors related to weather. It could be that many drillers do not start new wells after November in places like the Bakken play and the DJ Basin, and thus the latest month that they get permits could be October. So those permit number have to be seasonally adjusted to be meaningful.

     

    Nonetheless, I don’t buy some of the talk I’m reading on the internet that “the US shale drillers will keep right on going with oil at $65”. That idea is just totally ridiculous. The operating cash flow generated by US shale producers will decline dramatically if oil stays below $80 and they won’t be able to raise nearly as much capital because of lower stock prices and substantially higher yields required to sell bonds. So US shale drillers will be forced to cut back on drilling activity because of a simple lack of capital and cash flow to pay for horizontal drilling, which is expensive. This big drop in drilling activity, which will happen for sure if oil stays below $80, should cause US oil production growth to drop sharply in the first half of next year and that drop will probably cause the oil market to correct back up into the 80s by the second half of next year.

     

    I’ve been surprised that the Saudis have been willing to let oil prices fall all the way below $70. I’m starting to wonder if anyone really knows what oil price they need to balance their national budget. Same thing with the Russians–it’s difficult to get good credible information from the Middle East, South America, and Russia about national budgets and other subjects like what kind of oil production technology they’re using today and what their marginal cost of production is today. Do Wall Street analysts and those sleepy international agencies in Europe really know what’s going on in the Middle East and Russia? I’m starting to wonder.

    4 Dec, 08:41 PMReplyLike5
     
  • jj1937

    Comments (1455) | Send Message

     

    Dow 18,000 by XMAS. It’ll probably happen by Monday.

    4 Dec, 10:59 PMReplyLike0
     
  • Skaterdude

    Comments (698) | Send Message

     

    Oil and coal are not fungible and they are not used primarily for the same purposes. BOE is nice if you’re assessing overall energy consumption, but it’s not a good way to think about consumption across all energy sources. If steel production drops, how will that affect the people driving vehicles in Beijing or other metropolitan areas? If coal producers in the US close mines, how will that affect oil prices and consumption? Not as much as you might propose just by looking at BOE. People don’t fuel cars with coal, and power companies are building NG fueled power plants because NG is cheaper and cleaner. So if coal production drops in the US, it’s not going to directly cause gasoline prices to rise. My point in these examples is not to argue whether oil or NG prices will rise or fall, but simply to illustrate the lack of connection between markets and demand.

    4 Dec, 11:44 PMReplyLike4
     
  • Value Digger

    , contributor
    Comments (3663) | Send Message

     

    Author’s reply » Global Investor,

     

    Thank you for your compliments. The huge divergence between the reality and the market perception is more than apparent in the oil markets now.

     

    The geopolitical risks have worsened compared to 2013 and H1 2014, the GDP growth rates in 2014 are at or above expectations in the world’s largest oil consumers compared to 2013, while the crude inventories and the new permits have already started to drop rapidly. We talk for a 40% decline here.

     

    To me, this is the definition of: THEATER OF THE ABSURD.

     

    Let’s see how long this THEATER OF THE ABSURD will go on.

     

    Regards,
    VD

    5 Dec, 06:08 AMReplyLike4
     
  • Value Digger

    , contributor
    Comments (3663) | Send Message

     

    Author’s reply » Josh,

     

    Thank you for your compliments. As mentioned above, what is going on now in the oil markets is the definition of the: THEATER OF THE ABSURD.

     

    Let’s see how long the oil bears will keep behaving in this irrational manner trying to make money at the bottom although the facts are not there.

     

    Regards,
    VD

    5 Dec, 06:12 AMReplyLike3
     
  • TraderFool

    Comments (504) | Send Message

     

    Hello trader57,

     

    Re: “I don’t buy some of the talk I’m reading on the internet that “the US shale drillers will keep right on going with oil at $65″. That idea is just totally ridiculous. The operating cash flow generated by US shale producers will decline dramatically if oil stays below $80 and they won’t be able to raise nearly as much capital because of lower stock prices and substantially higher yields required to sell bonds”

     

    If oil price keeps going down, and I’m a shale driller with sunk cost already, wouldn’t I want to try to keep pumping MUCH, MUCH more first to try to keep my fixed costs even lower, to try my best to survive, before the inevitable happens? In other words, I think we might just be seeing the beginning of the price fall … sure, 6-12 months down the road, we’ll see some real bust happening (not all producers have enough liquidity to last 6-12 months), but the time from today to the next 3-6 months could be really painful for longs … before they cut production, I think, they’ll try to produce a heck of a lot more to try to survive, before the financial constraints starts to work – remember, financials have many avenues, some will still pump more, borrow from banks to suvive, etc. i.e. we could be looking at 6-12 months pain before recovery, before the banks finally say enough is enough, before capital markets starts to rate the bonds as junk, etc. These process could last a long time, and until then, we might be seeing continued increased weekly production which will keep depressing crude oil prices …

     

    Originally, I plan to go long on crude oil stocks, but I’m now thinking of holding back my longs until I see a real bottom in prices. I like to see US production slows down for 2 to 3 weeks in a row, and right now, we are just not seeing this happening at all – US producers keep producing more oil every week, and with Saudis not cutting down, the supply of oil on a weekly basis keeps going up, and prices inevitably must come down … I have a feeling, $65 will not be the immediate bottom yet … but let’s see …

    5 Dec, 08:44 AMReplyLike6
     
  • trader57

    Comments (253) | Send Message

     

    It will take a few months for drilling activity to decline. The OPEC meeting was only a week ago. Oil producers are not going to stop drilling any wells that they’ve already started, and I would think they have some contracts for a few months that can only be canceled in extreme dire situations. By March 2015 we should start seeing a substantial decline in oil rig counts. Production growth will then start declining quickly and US production could even start dropping by mid-summer.

    5 Dec, 11:32 AMReplyLike4
     
  • Holthusen

    Comments (638) | Send Message

     

    Very funny! Yet sadly correct, and getting worse. We are raising a generation of Electronic Gamers. They live in another world instead of the real world.

    5 Dec, 11:36 AMReplyLike4
     
  • blondguysc2001

    Comments (55) | Send Message

     

    Interesting article…lots of good data points, particularly how well you call out the “analysts” and hold them accountable for their calls. These people truly are nothing but weathervanes….at least the vast majority of them.

     

    I do think there is a temporary glut of supply that triggered the decline, coupled with the obligatory unwinding of long positions…crude prices may capitulate further, but they won’t stay down for long. The tricky part is staying patient and waiting for a tradeable bottom, and separating the long term winners from the ones with excess leverage and poor fundamentals. We know the hedge funds are herd animals so expect more piling on of short positions to drive crude lower.

    4 Dec, 07:54 AMReplyLike17
     
  • Value Digger

    , contributor
    Comments (3663) | Send Message

     

    Author’s reply » blondguysc2001,

     

    I am getting sick when I see how quickly all these highly paid “gurus” change their mind depending on which way the wind blows, while ignoring the facts. And they behave like parrots repeating the words and imitating the actions of another.

     

    This is why, I felt the need to write this factual article that clearly demonstrates what these “gurus” were telling us in 2013 and H1 2014, and what could drive prices at $150/bbl.

     

    Also, separating the wheat from the chaff is something that ALL the investors must do now. They must NOT make the mistake to load the heavily indebted energy companies because it will be a “dead cat bounce”, if these companies ever bounce back.

     

    Regards,
    VD

    5 Dec, 06:23 AMReplyLike5
     
  • Duago

    Comments (70) | Send Message

     

    Value Digger,
    I greatly value your research, time and effort put into you articles.
    However, timing is everything. This piece feels desperate. I have read a lot of details on the subject of late and there were many signs of this slump in prices coming that were not accounted for by those who only see oil prices as going up.
    Prices go up and they go down. I don’t see the compelling evidence that it will suddenly go up soon.

    4 Dec, 08:11 AMReplyLike9
     
  • TraderFool

    Comments (504) | Send Message

     

    Duago,
    Just pull up the price charts of crude oil over the past 20 years.
    You’ll see this current price drop is the 2nd longest drop over that period.
    The only time when crude had a bigger drop was back in 2008, from a peak of $147, down to a low of $33, near the 200 month MA. Today, we are near the 200 month MA as well which is currently around $60-$65 … we can’t time it precisely, but over the next few months, I feel we are close to the current bottom, and it makes sense to pick good quality issues relating to crude oil, and slowly work your way inside. Never go on margin, this is really Value Investing at its finest, and if you are not scared, you are not doing Value Investing properly – I won’t bat an eyelid if the purchases made this week drops by 50% more at the bottom, because history has shown that they will rise much, much more. I’m looking at +100% gains over the next 1-3 years at the least …

    4 Dec, 04:13 PMReplyLike13
     
 
  • Dan Teodor

    , contributor
    Comments (110) | Send Message

     

    Duago,

     

    Demand for oil in the six segments that simply cannot stop are impervious to economic slowdown (plastics, oceangoing freight, train freight, fertilizer, aviation, modern armies). Regardless of consumer slowdowns, these six segments represent 80% of oil and net gas consumed around the world. When economies slow down, the food, freight, aviation and military segments do not, they continue on. A recession in Europe or China would only slow the rise in demand, not reverse it. Look at the demand trend of the past year and understand that even if demand only rises at one half the slope is has followed from 2004 until now, it will still outstrip current expected global production for Q1 2015. Oil price strip is highly elastic to tiny percentage changes in the supply-demand balance. Current situation is creating the coiled spring and that coiled spring WILL unwind before the end of 2015.

     

    We just hope it is a measured controlled unwind throughout the year, otherwise we will have the $140 spike we saw in 2008 for a month or two before settling down to something in the $90 – $100 brent range.

     

    Set your DCF and NAV models for $90 brent / $85 WTI. This is going to get ugly before the weather gets cold again in 2015. I’m willing to go out on a limb and say you can quote me on this one.

     

    Here is the reality when Brent is $70/bbl for more than one or two months…

     

    1. Venezuela is cash flow negative and cannot make coupon payments on its foreign debt. Venezuela WILL default on its debt before end of 2015 in this price regime.

     

    2. Iran cannot feed its army at this price. The mullahs depend on the support of their army to maintain power. Kicking this leg out from under the government stool makes their continued existence precarious. Martial law kind of precarious.

     

    3. The government in Tripoli cannot feed their guard at these prices. If the government in Tripoli cannot do this, they cannot protect the pipes that carry crude to their northern port. When that happens the other government in the west breaks through and shuts the pipe down to prevent revenue from reaching the Tripoli government and thereby trying to strangle it. 800,000 bbl/day go off stream.

     

    4. Saudi Arabia is burning $2b/month from their sovereign wealth fund. At that burn rate, the ENTIRE sovereign wealth fund runs dry in 60 months. They need to turn the boat around long before that happens because if they burn through more than about 25% of it, angry men with beards and automatic rifles start to hang around the palace gates. Not a stable internal situation. Riyadh has made major financial promises to its citizens in return for peace and their support. And in Saudi Arabia, the citizens do not have peaceful protest marches when they are aggrieved.

     

    5. Russia is burning $2.5b/month form their sovereign wealth fund. At that burn rate, the ENTIRE sovereign wealth fund runs dry in 48 months. They will tighten their belts, suffer, freeze, grit their teeth and tough it out. BUT! (and this is a big one) understand that at the back of the mind of every strategist in the Kremlin is the nagging thought that all they have to do to cause a global geopolitical crisis and force the price of energy to whipsaw back up to $100/bbl in the course of a week is to kick the hornets nest: Roll the tanks into Donetsk and Lukhansk. Overnight crisis and EU buckles because it is now winter and Germany will freeze without the Ukrainian transit gas (Nordstream can only supply about one third of what Europe needs to stay warm).

     

    6. I can’t even begin to fathom what the dynamics going on in Syria / Iraq are right now, but it can’t be good. I’m sure Baghdad had to guarantee Kurdistan a minimum cut in the negotiation to let them export. Well, either Baghdad or Kurdistan is not going to get that minimum cut agreed in that negotiation. How do you think things are panning out in their relations now?

     

    This situation has the makings of a new Arab Spring / Cold War settling in… and it cannot remain in equilibrium for a whole 12 months.

    4 Dec, 07:12 PMReplyLike23
     
  • rjj1960

    Comments (1370) | Send Message

     

    Value Digger,one of 3 people on SA with brains. Good job , appreciate the effort.

    4 Dec, 08:29 PMReplyLike10
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Duago,

     

    Thank you for your comment. But, my article is full of facts as always. If you disagree with the facts, it is your choice.

     

    Regards,
    VD

    5 Dec, 06:26 AMReplyLike2
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » rjj1960,

     

    Thank you for your compliments. Good luck with your investments.

     

    Regards,
    VD

    5 Dec, 06:29 AMReplyLike1
     
  • ainjibi

    Comments (13) | Send Message

     

    Who are the other 2 with brain on SA ? Would appreciate the info. !

    5 Dec, 02:57 PMReplyLike2
     
  • rjj1960

    Comments (1370) | Send Message

     

    Filloon and Fitzsimmons.

    5 Dec, 05:50 PMReplyLike2
     
  • ainjibi

    Comments (13) | Send Message

     

    Thanks !

    5 Dec, 06:01 PMReplyLike0
     
  • ggig2000

    Comments (10) | Send Message

     

    who are the other two? ; )

    6 Dec, 10:36 AMReplyLike0
     
  • mikenh

    Comments (223) | Send Message

     

    The change in commodity prices, oil included, was triggered by a change in financing attitudes of some buyers. Changing Fed policy added uncertainty to a sure bet. Same thing happened on a smaller scale when Bernancke hinted that bond buying might stop someday.

    4 Dec, 08:26 AMReplyLike2
     
  • themacguy521

    Comments (26) | Send Message

     

    VD. Thanks and could not agree more.

     

    Oil Bears and Analysts are driving the oil price down with their unrealistic attitude towards:

     

    a) Negative growth;
    b) India’s energy appetite; and
    c) The fallacy of Nirvana in the Middle East.

     

    Not to mention that Pick-Ups and large SUVs are back in vogue in North America…

     

    I also believe that Putin will rattle his sabre and agitate conflict somewhere, to raise uncertainty and thus prices – if the drought in Oil prices remains lower much longer. After all, the fall in the price of crude in the mid 80’s (and Reagan) brought the USSR to its knees. He will not repeat that. Guaranteed.

     

    Waiting for a firm bottom – then backing up the truck for more PTA.

    4 Dec, 08:34 AMReplyLike9
     
  • Old Rick

    Comments (512) | Send Message

     

    Please let us all know when there is a firm bottom so we can all benefit from your insight.

    4 Dec, 03:34 PMReplyLike7
     
  • TraderFool

    Comments (504) | Send Message

     

    Old Rick,

     

    No one will know the absolute bottom, at the “Hard Right Edge” of the charts. Bottoms are only know once some time are passed, and by then, you won’t be able to buy at the bottom price. That’s the reality of prices. The key is Money Management – always make sure to have enough cash to buy at lower prices when bargains avails themselves. For highly cyclical stocks, a rough yardstick is 75% fall in prices from the peak for decent names. E.g. SDRL is one that I think could be interesting – peak price was $48 in 2013, and is now trading near $12, or 75% fall. I would allocate around 4% of my portfolio to this, to be split into 4 bullets, and have actually deployed first bullet at $13.50. I’ll be looking for a final buy price of around $7 (approximately 50% fall from my first entry), and these types of buys are just put into the drawer and forget. When the drawer is opened in 1-3 year’s time, you will most likely earn anywhere from 50% to 100% gains or more.

     

    Meanwhile, have the stomach to see the value of what you bought dropped by 50% from what you purchased. Don’t ever think about selling then, because the Reward to Risk of holding is much, much better.

     

    And diversify into 3 issues at the very least, so that total exposure to crude oil is no more than say 12% trading capital. I am just very cautious, but of course, at the very bottom, for the 4th buy, you could double or triple the buy size and raise the 12% up to say 15%-20% capital … but these type of substantial increase must show capitulation, i.e. big price drops with big volumes …. (SDRL has shown the first capitulation last week and this week, and usually, there’s more than 1 capitulation). And if you are a nimble trader, you would also consider adding on the way up, e.g. when Weekly RSI(14) crossed above 20 and Daily RSI(14) dropped back down to around 30-40 or so ie. dipping on the way up, if you are worried that you only have 3% capital in this during the bottom.

     

    PS. SDRL falls into my screen, because at $13.50, it is trading at NAV, and well below Replacement Cost. So, if it falls to $7, that would be trading at 50% NAV approximately, and is good enough for me.

    4 Dec, 04:21 PMReplyLike9
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » themacguy521,

     

    Thank you for your compliments. Also, good luck with PTA (Petroamerica Oil) which is debt free with a pristine balance sheet, as shown in my previous articles.

     

    Regards,
    VD

    5 Dec, 06:29 AMReplyLike1
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Old Rick,

     

    Warren Buffett has said more than once that he has NEVER managed to buy at the bottom and sell at the top. Nevertheless, he is a billionaire.

     

    Regards,
    VD

    5 Dec, 06:31 AMReplyLike5
     
  • les2005

    Comments (15) | Send Message

     

    excellent article. While I’m hesitant to predict WHEN oil prices will go back up, it’s obvious that they will. Outside the middle east, most resources cannot be economically accessed at a price below $70, so while the market price may go below, the pendulum invariably will swing back because
    – more and more suppliers will go out of business or reduce supply
    – consumption and hence demand will rise if oil is that cheap.
    There are a lot of factors at play as you well demonstrated – geopolitical, GDP growth, but also competing energy sources (and I’m not talking nuclear fission, but renewables). But the overriding factors appear to be speculation and herd behaviour. And we all know they can only go for so long into one direction.

    4 Dec, 08:37 AMReplyLike8
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » les2005,

     

    Thank you for your compliments.

     

    Regards,
    VD

    5 Dec, 06:32 AMReplyLike0
     
  • Mark_Stphens

    Comments (13) | Send Message

     

    I’ve been keeping an eye on all of the airlines. Since gas prices are so low right now, almost ALL of them have had large gains the past month.

    4 Dec, 08:45 AMReplyLike2
     
  • Family Investor

    Comments (558) | Send Message

     

    Great article, appreciate you sharing your research.

    4 Dec, 09:01 AMReplyLike5
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Family Investor, Thank you for your compliments. Regards, VD

    5 Dec, 06:32 AMReplyLike0
     
  • Old Mule

    Comments (25) | Send Message

     

    The article makes some very sound points. I must disagree with the view that the shale plays are going to “play out” in the near future. If anything, we have continually underestimated what innovation and knowledge are achieving in exploring and producing from tight formations. Lower prices will slow the growth in shale exploration and production, but the quantity of resource present in shale plays is enormous and not fully understood.

    4 Dec, 09:04 AMReplyLike5
     
 
  • bettheranch

    Comments (19) | Send Message

     

    Old Mule, you are correct. We have, indeed, continually underestimated what innovation and knowledge are achieving.

     

    Also, not all shale formations are so thin as to horizontally support only single laterals. Some, like the Wolfcamp, are very thick, and the first wells drilled are really only the first of many stacked laterals.

     

    Back to innovation and knowledge, that is not limited to shale plays, either. Not all of the new oil production is shale production. At least some if not much of it is from new horizontal development of non-shale assets. For example, look at the Spraberry in W TX.

     

    Also, the shale wells that are drilled and produced typically hold under the leases of unsophisticated lessors other zones that have not yet been tapped.

     

    There is more to be squeezed out of these formations than most people realize, and with advances in cost savings along the way, there still remains quite a bit of money to be made.

    4 Dec, 11:07 AMReplyLike2
     
  • Doug Dallam

    , contributor
    Comments (8116) | Send Message

     

    Old

     

    If it is “not fully understood” then you cannot say anything about future shale production. Currently, the author is correct. Until production is realized, such as current retrievable shale oil, for investment purposes, it doesn’t exist.

    4 Dec, 11:30 AMReplyLike3
     
  • bettheranch

    Comments (19) | Send Message

     

    To the contrary, even though it is not fully understood, we know for sure that we are not getting all out of it, and there has to be a way to get more out of it as technology and knowledge improve and as economic opportunities arise.

     

    What it is going to take to send men to Mars is not fully understood, either. But that does not mean that we cannot say anything about sending men to Mars at some point in the future.

    4 Dec, 11:46 AMReplyLike2
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Old Mule,

     

    Thank you for your kind words.

     

    In terms of the shale oil and the technology, I believe that the technology cannot make wonders overnight. And more importantly, the current technology cannot get a lot better overnight, given that it took us (George Mitchell) many years to improve this shale process and bring it to the point where we are now.

     

    If the oil price remains at the current levels for long, the peak oil event will occur in 2015, in my view.

     

    Regards,
    VD

    5 Dec, 06:39 AMReplyLike1
     
  • Dr. Z.

    Comments (93) | Send Message

     

    Breaking News: Publisher of oil newsletter bullish on oil.

    4 Dec, 09:11 AMReplyLike11
     
  • Jion

    Comments (528) | Send Message

     

    An oil newsletter that contains short ideas too.

    4 Dec, 09:38 AMReplyLike9
     
  • samberpax

    Comments (115) | Send Message

     

    Dr. Z.:Breaking News: Publisher of oil newsletter bullish on oil.

     

    ———————-…

     

    Please let me know when the majority of oil newsletter writers turn bearish, that is when I’ll be a buyer.

     

    best,
    -samberpax

    4 Dec, 09:47 PMReplyLike1
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Dr. Z.,

     

    You are NOT a subscriber of my newsletter that was out just 3 months ago, in September 2014, when the oil price was already falling.

     

    If you were a subscriber, you could check my picks and the recommended entry prices.

     

    And please let me know and I will gladly send you the returns from my picks in H1 2015, based on the recommended entry prices.

     

    Regards,
    VD

    5 Dec, 06:48 AMReplyLike1
     
  • Emmanuel Daugeras

    , contributor
    Comments (44) | Send Message

     

    Good article. I like the attitude to keep one’s head cool and act on facts, not emotions.
    I buy the long case for Oil, long term. But the question is that of how long it will take to come back.
    The political unrest in the middle east ist not necessarily a cause for less supplies: the ISIS for instance uses Oil to finance their war. The anarchy actually can dislocate the production discipline and lead to lower prices. But agreed with you, anarchy is not sustainable and Oil prices will eventually move up again.

    4 Dec, 09:20 AMReplyLike2
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Emmanuel, Thank you for the kind words. The political unrest in the Middle East often leads to production disruptions, statistically speaking. And things in the Middle East are not better now than in H1 2014. In contrast, things now are much worse.

     

    Rgeards,
    VD

    5 Dec, 06:53 AMReplyLike1
     
  • Timothy Coates

    Comments (9) | Send Message

     

    Wow!! Talk about talking up your book! There are so many things wrong with this article it makes it hard to even take it seriously. I’m wondering if this is Dan Dicker writing under a different name with his whole “Barrels at risk” theory that artificially buoyed prices for the 5 years between 2009 and now.

     

    The author seeks to discount the additional 3.5 million barrels the US produces that were not available 5 years ago by saying the wells dry up fast and the production cost are too high. That is the true “lame thinking” here. I heard estimates that some production cost in the Bakken are as low as $29 dollars and that $70 is actually on the high end. His cost estimates are from years ago. Good ole American ingenuity drives down the cost of recovering this oil daily.

     

    The author doesn’t deal with the death spiral that OPEC currently finds itself in. The more profligate members need a high oil price in order to maintain their spending. If I can’t make my revenue with a high oil price what is my alternative? That’s right pump more. Their state goal at this last meeting was to keep the production quotas in place. What was unsaid and the real reason oil took another dive is cheating on production quotas will reach an all time high over the coming months as these governments seek to shore up their finances.

     

    Finally, the author displays several charts but proceeds to ignore what the charts say. We have firmly broken all uptrends and any recovery will be very difficult. I would further break his argument down but that would just give more credence to yesterday’s theory about the state of energy supplies in the world.

    4 Dec, 09:28 AMReplyLike13
     
  • Short&Stocky

    Comments (40) | Send Message

     

    Comments like this are what give me confidence that oil bulls will make money

    4 Dec, 11:33 AMReplyLike13
     
  • thkalinke

    Comments (134) | Send Message

     

    The OPEC death-spiral, with poorer members exceeding quotas, has been going on for at least a couple of decades, nothing new there. As far as a Bakken play that can produce for $29 and keep it there – if you find one, please share.

    4 Dec, 11:37 AMReplyLike8
     
  • Timothy Coates

    Comments (9) | Send Message

     

    I picked up the $29 number from a Market Watch article written by Tim Mullaney entitled “Opec is wrong to think it can outlast U.S. on oil prices”. If that number is incorrect it’s not because I made it up. I agree that cheating has been going on since OPEC’s inception but never before have the weaker members of OPEC been in such tenuous positions with their populace which I believe will spur further more pronounced cheating.

    4 Dec, 01:30 PMReplyLike2
     
  • Class VI

    Comments (3) | Send Message

     

    The author argues that saudi has already reached or near’d max capacity pumping…

     

    So whats the max production capacity for the rest of OPEC for them to keep ‘pumping more’ to make budgets meet?

    4 Dec, 01:52 PMReplyLike2
     
  • quantcoyote

    Comments (66) | Send Message

     

    TC: I don’t necessarily disagree with your scepticism, but apart from Saudi Arabia there is very little spare capacity in OPEC (Libya’s may be higher than the rest, but even that’s not so high and Libya is likely to have real problems for a while). So the capacity to cheat is limited, even if the will to do so may not be. I’m beginning to wonder if SA gives a toss about OPEC at all. They can’t get the other members to cut (because they will cheat), and they need not be concerned about them increasing output.

    4 Dec, 02:33 PMReplyLike1
     
  • Timothy Coates

    Comments (9) | Send Message

     

    quant: you could be very well right about their lack of capacity. I have read though in the last couple days about another 300k barrels coming online from a Kurdish/Iraqi government agreement as well. My point was simply that US shale drilling cost are only dropping so that isn’t supportive of higher prices and OPEC isn’t cutting or even holding to the quotas they agree on.

    4 Dec, 03:17 PMReplyLike2
     
  • Noah Research Partners

    Comments (6) | Send Message

     

    While you are not wrong, I have a hard time understanding why this wasn’t presented or “paraded” 6 and 12 months ago.. Surely this has not been an overnight occurrence.

     

    Secondly, just like in October when everybody “woke up!!” and sent the market down 10%, because NOW the world is going into recession, good call btw. I highly doubt you bears are any more correct on your reactionary projections after crude fell from $90, you must be rich predicting this stuff.

     

    As an aside Gartman has been one of the best contrarian indicators of the past 2 years.

     

    And just to put my money where it counts, not that seeking alpha isn’t awesome.I recently sold multiple strike puts on EOG, NOV, PXD, XOM, CLR. Implied volatility is ridiculously high, and if history is any indicator its a very high probability trade.

    4 Dec, 06:07 PMReplyLike2
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Excellent said, Short&Stocky.

    5 Dec, 08:01 AMReplyLike1
     
  • Jion

    Comments (528) | Send Message

     

    It’s the “follow the trend” guys. Until its end….but usually they realize the end too late.

    6 Dec, 07:10 AMReplyLike0
     
 
  • Edmund Shing

    , contributor
    Comments (31) | Send Message

     

    Good, detailed piece, even if I am running the risk of confirmation bias (I am long oil stocks). But one thing. Nuclear fusion reactor on the back of a car – that is Back to the Future, rather than Star Trek!
    Edmund

    4 Dec, 09:29 AMReplyLike8
     
  • MAYHAWK

    Comments (528) | Send Message

     

    Edmund,

     

    Yes, that would be Dennis “Marty McFly” Gartman. To be honest, I would rather have the sports almanac than my oil stocks right now.

    4 Dec, 03:21 PMReplyLike1
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Edmund,

     

    Thank you for the compliments. And when it comes to the nuclear fusion reactor, I do not disagree with you. We can definitely see it both ways.

     

    Regards,
    VD

    5 Dec, 06:56 AMReplyLike1
     
  • contrarianadvisor

    Comments (997) | Send Message

     

    A few months ago with oil above $100, I was a lonely bear calling for sub $50 oil. Now that oil has fallen $35, I have lots of company in the bear camp. Still there are lots of analysts and investors trying to call a bottom in oil prices here so i would say that sentiment is somewhat equally divided between bulls and bears here. I think we have a ways to go before oil bottoms. First, we just had a major trend break and those don’t turn around quickly. Second, most of the recent decline was in reaction to OPEc deciding not to cut output. In other words, the focus has been on supply while I think what drives oil below $40 in 2015 will be much weaker demand than is currently being assumed, fueled by a global contraction.

     

    Both oil and oil stocks have a lot further to fall in upcoming months. There will be a far better entry point for both later in 2015. Investors would be wise to exercise some patience here and let things play out for a while. Buying the first sharp break is rarely a good idea, particularly not when there are so many signals indicating that the global economy is losing momentum.

    4 Dec, 09:33 AMReplyLike8
     
  • blittrell

    Comments (8) | Send Message

     

    Ironic that an analyst writes an article encouraging investors to ignore the analysts.

     

    Oil prices will ultimately come back, until then focus on the myriad of economic sectors that benefit from cheaper energy. It should also present a great buying opportunity for a whole host of energy stocks.

     

    This piece has too much emotion embedded in it for my liking.

    4 Dec, 09:40 AMReplyLike4
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » blittrell,

     

    I am not a professional analyst who is living from this analysis.
    I am an investor instead.

     

    Regards,
    VD

    5 Dec, 06:58 AMReplyLike4
     
  • 745

    Comments (211) | Send Message

     

    Good article Digger. Whether people agree with your points or not, I don’t see how any investor could disagree with the first two paragraphs of the article. You nailed it spot on. One question though, would you care to share any specific names of shale producers that You feel will be extinct within a few years?

    4 Dec, 09:48 AMReplyLike8
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » 745,

     

    Thank you for your compliments.

     

    Please see my previous articles and comments to find my bearish calls on several energy stocks over the last months i.e. Halcon Resources (HK), Goodrich Petroleum (GDP), Cobalt International (CIE), GMX Resources (GMXRQ), ATP Oil and Gas (ATPGQ), CAMAC Energy (CAK), Pinecrest Energy (PRY.V), Midstates Petroleum (MPO) etc.

     

    Regards,
    VD

    5 Dec, 07:05 AMReplyLike1
     
  • Trade In Mexico

    , contributor
    Comments (598) | Send Message

     

    Absolutely brilliant title and analysis!!!!

     

    The title really sums up how stupid investors are being now. The current daily correlation between a 50 cent or $1 move in oil taking down oil stocks by a few percent is ridiculous. Dennis Gartman has no credibility, I don’t understand why CNBC has him on regularly.

     

    Thanks again for the article!

    4 Dec, 10:09 AMReplyLike6
     
  • contrarianadvisor

    Comments (997) | Send Message

     

    “Dennis Gartman has no credibility, I don’t understand why CNBC has him on regularly.”

     

    They have Jim Cramer on, so why not Dennis Gartman? They both change their minds on a daily basis and do it with conviction.

    4 Dec, 10:39 AMReplyLike7
     
  • Doug Dallam

    , contributor
    Comments (8116) | Send Message

     

    Cramer needs to take my friends 100 level college logic class. The first thing my friend tells his students, on the first day is, “Getting louder doesn’t make your argument better.”

    4 Dec, 11:34 AMReplyLike5
     
  • Trade In Mexico

    , contributor
    Comments (598) | Send Message

     

    Contrarian, That is true about Cramer but the difference is that CNBC could eject Gartman with ease, while getting rid of Cramer would mean getting new anchors and having to replace his show.

     

    Right now, small cap oil stocks should be bought for a year end rally, stocks like MDR, WG, etc could see huge gains from current levels.

    4 Dec, 07:00 PMReplyLike2
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Trade In Mexico,

     

    Thank you for your compliments.

     

    Regards,
    VD

    5 Dec, 07:06 AMReplyLike0
     
  • CSilver

    Comments (16) | Send Message

     

    Oil prices are bound to rise again… Just wait. Everoyne is getting excited over low gas prices but we all know it’s a cycle. If we’re at the bottom, you know the peak is on the way

    4 Dec, 10:14 AMReplyLike3
     
  • moatfrog

    Comments (749) | Send Message

     

    Everyone seems to have an opinion on oil pricing and what will happen to stocks. Up – down talk gets to be nauseating. Some articles are short winded while others (this one) are long winded. One equals the other. Forgetting all of that, I thoroughly know is that I filled up my car yesterday smiling at my lower fuel bill. I also realize, OPEC be damned, oil prices present a buying opportunity both at the pump and with the cheaper share prices of the big producers. Observing more cars on our roads and those in China and elsewhere just adds frosting to the cake. What are you doing? Are you immersing yourselves in the noise presented by this article and others of its ilk, or are you adding some oil shares to your portfolio?

    4 Dec, 10:40 AMReplyLike1
     
  • Noah Research Partners

    Comments (6) | Send Message

     

    Couldn’t agree more, everyone in the world is now an oil analyst. Specifically, since oil has dropped considerably, they project more declines..what are the odds?!!

     

    I think investors need to pull the trigger on stocks they wanted lower instead of watching tv for a buying signal.

    4 Dec, 06:07 PMReplyLike3
     
  • Realtoi

    Comments (318) | Send Message

     

    Buy quality that has paid uninterrupted dividends for decades, despite what happened with oil prices. That way you’ve got whatever situation we’re in now covered. You get paid for waiting..

    4 Dec, 07:32 PMReplyLike2
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Noah Research Partners,

     

    What you describe is the definition of “HERD MENTALITY” that has brought the oil price at the current ridiculously low levels.

     

    But Einstein has said: “Two things are infinite: the Universe and human stupidity. And I am not sure about the Universe.”

     

    Regards,
    VD

    5 Dec, 07:10 AMReplyLike1
     
  • irishmaninbelgium

    Comments (49) | Send Message

     

    I agree that the ‘glut’ in supply is a bit of a nonsense and I’ve read a few articles recently lending weight to this argument.

     

    However, the claim that $80-$100 is the breakeven for shale seems unfounded – I think it was the IEA that said that only 4% of production uneconomic under $70?

     

    I also read a very interesting article today, I think on CNBC (apologies for the lack of sources), that discussed how transportation costs have plummeted in the past years.
    It mentioned that in 2011, companies were paying up to $28 a barrel in transport costs. It is now $1-$3 because of pipeline construction.
    If that is indeed the case, it is clear that a lot of shale is economic way below $70.

     

    Gartman and his nuclear fusion. What a tool. I made the exact same point elsewhere that unless engines are replaced with fusion reactors and someone discovers how to make plastic from ‘fusion’ we will be using oil for some time to come…

     

    I think the plummeting oil prices are the result of speculation more than any other factor but, as always, the market can remain irrational for longer than most of us can remain solvent.

     

    GL

    4 Dec, 10:56 AMReplyLike4
     
  • Vincent1966

    Comments (329) | Send Message

     

    I hope he’s right…that we’re not going to see a “new normal” in oil prices, but it’s too early to tell. Don’t underestimate the impact of overhead supply in oil stocks. A whole lot of damage has been done here and if we don’t see a rapid reversal, it’s going to be a long and painful thing to watch as holders bail out on any rally attempt.

    4 Dec, 11:00 AMReplyLike3
     
 
  • meridian6

    Comments (339) | Send Message

     

    It’s simple. Saudi Arabia is the only low cost producer in the world, but the rest of OPEC has costs similar to the US.

     

    Saudi only produces 10M bbl out of 30M bbl. I predict NOCs can only withstand the pain for 6 months. after that, they can elect to exit OPEC, and form a non-Saudi cartel to sell at $80-$90 band. Saudi can sell their 10M bbl cheap if they elect to, but that’s not enough to meet global demand, so buyers will have to pay non-Saudi price.

     

    4 Dec, 11:01 AMReplyLike5
     
  • bettheranch

    Comments (19) | Send Message

     

    Value Digger I do not think that Seeking Alpha is including your articles in their daily email of “Today’s articles on Energy Investing.” Or at least I have not been seeing them there.

    4 Dec, 11:10 AMReplyLike1
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » bettheranch, I do not have any idea about it. Thank you for the heads-up.
    Regards, VD

    5 Dec, 07:11 AMReplyLike0
     
  • irishmaninbelgium

    Comments (49) | Send Message

     

    Also: Andrew John Hall has been dead wrong for the past few years.

     

    He is betting that the price of oil will increase. He is correct in this assertion. Everyone knows the price of oil is going to go up, eventually.

     

    ““When you believe something, facts become inconvenient obstacles,” Hall wrote in April, taking issue with an analyst who predicted a shale renaissance could result in $75-a-barrel oil over the next five years.”

     

    He should listen to his own advice, it seems.

    4 Dec, 11:11 AMReplyLike2
     
  • Doug Dallam

    , contributor
    Comments (8116) | Send Message

     

    Fusion Reactors, indeed. Right around the corner.

     

    Here is one article where the “5 year” buzz line comes from:
    http://bit.ly/1viOe43

     

    “The team acknowledges that the project is in its earliest stages, and many key challenges remain before a viable prototype can be built. However, McGuire expects swift progress. The Skunk Works mind-set and “the pace that people work at here is ridiculously fast,” he says. “We would like to get to a prototype in five generations. If we can meet our plan of doing a design-build-test generation every year, that will put us at about five years, and we’ve already shown we can do that in the lab” . . . . An initial production version could follow five years after that.”

     

    And then ramping up commercialization of fusion power, another decade? we’re looking at 15-20 years best case scenario before fusion has any affect on fossil fuel prices. This just goes to support the author’s conclusion that oil prices are low due to “lame thinking.”

    4 Dec, 11:49 AMReplyLike2
     
  • Vijoda

    Comments (69) | Send Message

     

    Growing up, my neighbor Roy had the coolest mom. She let him put up a poster in his room of an eagle swooping down on a little mouse that had a single finger extended in the air. That visual flashed in my mind as I read this.

     

    No chart of the relationship between the strength of the dollar and the price of oil. Is it relevant?

     

    Good luck with your picks.

    4 Dec, 11:57 AMReplyLike3
     
  • ant21b

    Comments (539) | Send Message

     

    Oil will stay low for at least a few years the world economy is contracting not expanding and the U.S will enter a recession in about 2.5 years or so tops as part of the business cycle. Look at how oil stayed low in the 80s and 90s after being high in the 70s it was not a short term phenomena.

    4 Dec, 12:02 PMReplyLike0
     
  • billcharlesdixon

    Comments (1705) | Send Message

     

    I agree with you; oil should rise in 2015 if not this month. I don’t see much if any downside: we all knew that opec would probably not cut production; yet when they ratified that fact, oil prices went down another 10%. The whole thing is overdone, and what went down (in this case) must go up again.

    4 Dec, 12:03 PMReplyLike1
     
  • Flash Crash Gordon

    Comments (403) | Send Message

     

    Lot of knives likely left to be caught in this paradigm shifting move…not saying don’t dollar average, but be wary more pain likely lies ahead.

    4 Dec, 12:29 PMReplyLike3
     
  • Ruben12345

    Comments (418) | Send Message

     

    It would have been helpful to foresee this decline in oil was coming but no one did. .. To now claim we know what happens next seems not credible (again)

    4 Dec, 12:39 PMReplyLike4
     
  • IncomeYield

    Comments (1847) | Send Message

     

    Seems that some did. Some fairly large oil related positions and assets were sold over the past year or so.

    4 Dec, 01:01 PMReplyLike0
     
  • john001

    Comments (671) | Send Message

     

    Value Digger….another informative article. Thanks

     

    To all those investors who believe operators in the unconventional reservoirs can keep producing while oil prices are dropping, check out their H1 budget forecasts for negative changes in CAPEX. That will remove much of the guess work and hand waving on how profitable they expect their operations to be. They know better than the analysts and economists on when to turn the taps off.

    4 Dec, 01:03 PMReplyLike3
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » john001, Thank you for the compliments. Regards, VD

    5 Dec, 07:14 AMReplyLike0
     
  • juscallmej

    Comments (38) | Send Message

     

    good article.. totally agree.
    gartman is the worst of the worst in my opinion. he really is clueless. I dont know why they keep having him on every other day on fast money and the like.
    Its funny how media affect sentiment changes on a dime that makes everyone forget the bigger picture as you referenced above.
    remember ebola and the airline stocks in october? ignore the noise.

    4 Dec, 01:47 PMReplyLike4
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » juscallmej, Thank you for the compliments. Truth is that some people had better not speak publicly so often because they shoot themselves in the foot.
    Regards,
    VD

    5 Dec, 07:16 AMReplyLike1
     
  • Freddyfred

    Comments (4) | Send Message

     

    That was NOT a LAME article ! Great Job! You covered a lot of material.

     

    I think at some point sooner than the media and herd thinks that oil will bounce hard upward. OPEC made a good move to instigate a needed correction and put the industry in check. Now I think (in the short term) we will see a scary drop lower fueled by more moves by OPEC such as todays move to cut prices from SA to Asia/India and USA. SA sees India as growing and needs to subdue the fact that demand is growing. I would not be surprised if massive amounts of capital is also used to force the commodity down further to keep the herd moving ion that direction. OPEC knows that they can turn it around very quickly (just tell the world they are cutting production and the herd reverses quickly) when they need to so they are in the drivers seat for sure.

    4 Dec, 02:00 PMReplyLike4
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Freddyfred,

     

    Thank you for the compliments.

     

    A LOT of people and greedy oil speculators will be burned by shorting at the current levels. They have to pay for their mistakes and their greed, as always.

     

    Regards,
    VD

    5 Dec, 07:18 AMReplyLike0
     
  • nino91007

    Comments (226) | Send Message

     

    Oil fluctuates….down, then up. The question is how much MORE down it will go before it goes up…..yes $100+ is real but when? 2015 or 2018.

    4 Dec, 02:20 PMReplyLike1
     
  • goldenretiree

    Comments (932) | Send Message

     

    Lot of chutzpah here. You denigrate those with opposite viewpoints, then present everything you say as “facts.” When the fact of the matter is, nobody has a perfect crystal ball. Yes, oil will go back up. Question right now is “when.” The other question, how far does it fall from here? When you can definitively answer those questions, you can invest with confidence. Let us know when that occurs. Lot of good research here if you tone down the ego.

    4 Dec, 02:34 PMReplyLike4
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » goldentree,

     

    There is nothing about ego here. You misunderstood it. I have a clear opinion that I support it with facts and links. If you have a different opinion, you are welcome to present it coupled with facts in another article. If you present speculation only, it will not help, I think.

     

    Regards,
    VD

    5 Dec, 07:21 AMReplyLike3
     
 
  • charles hinton

    Comments (2798) | Send Message

     

    value ,i agree with golden…there is too much ego.

     

    when you started quoting your” gods ” and casting scorn on any who disagree i lost interest.

     

    ps mr market is always right no matter how much fundamentalist cry.

    5 Dec, 11:11 AMReplyLike2
     
  • Dirk43

    Comments (17) | Send Message

     

    Gartman is surely way to optimistic with his fusion forecast but a better and more immediate alternative is already here, Hydrogen powered cars. With new technical breakthroughs coming rapidly such as graphene membranes, Hydrogen will replace electric cars this decade and will start to make a serious dent in gasoline as well.
    Another paradigm changing event already mentioned is China. The enormous real estate debt bubble and steel production bubble also fueled by debt has to come to a head soon. Yes, the collapse of China has been forecasted “forever” but so was the 2007 US recession which also was belittled for years right up to the edge. So was the collapse of the Soviet Union. The Chinese Govmnt has been able to keep the ball in the air because they control most of the economy but the Piper stands at the door. A Chinese economic collapse which WILL come will also collapse the oil price. Maybe it will recover some first but no energy investor can afford to ignore this.
    Caveat Emptor!

    4 Dec, 02:52 PMReplyLike0
     
  • firstinsnow

    Comments (509) | Send Message

     

    I don’t know, I’m not sure of any of this, and I’m standing by my
    position, firmly. [until I change it]
    What I am sure of, is that this situation will change, and that change
    is inevitable.
    NO, I am not an analyst.

    4 Dec, 03:30 PMReplyLike3
     
  • D. Rockefeller

    Comments (135) | Send Message

     

    I don’t know what the price of oil will be, just look at the charts and they are still going down. China is buying up a lot of excess oil and sticking it in tankers etc.
    What I want to know is a chart from the EIA on Zero Hedge showing retail gasoline sales in the USA have declined almost 75%!!!! since 2004. Then Bloomberg showed a photo of the first gas station in America selling gas for below $ 2.00. Weird that below the gas price it showed Diesel selling for $3.39 plus! The EIA does not explain that stuff well why diesel is much more expensive than gasoline.(a six cents higher tax from the Feds. low suphur costs and “demand” globally????) Then the EIA shows gasoline production in the USA has risen!!! OK that tells me big oil is exporting refined petroleum products to other countries to make tons of money off us. Killing diesel over environmental EPA type stuff for political reasons because gasoline costs more to make than Diesel even with the other factors and six cent tax, and Exxon is back in Green River developing their shale oil in situ electro-fracking method for the largest oil play on earth-TRILLIONS of BARRELS in AMERICA. All comes down to costs, the big boys games, and ignorance of the average US citizen willing to be played and fleeced.
    Yes overall your article was good but there’s a lot more going on the secret weird world of big oil than any of us will understand like how in the 70’s the US “government” supposedly allowed Saudi Arabia to shut down our nation in the WINTER and I froze waiting in gas lines? The USA??? Biggest army on earth plus Standard Oil of California developed the Saudi oil???? Or that their lawyer, John J. McCloy told at least seven US “presidents” what to do and say through Reagan and HW Bush? Heck he even ran the Warren Commission with Dulles and World War 11. Harold Hamm says he can drill existing wells in the “Scoop” at 99 cents a barrel and tried to sue OPEC. He is not going to shut down next year and plans on ramping up oil production big no matter what the price is. He wants to ream OPEC and make them blink unlike the 1986 oil bust when we went broke.
    All highly interesting and I am watching and going to buy back when I think oil has hit the low-could be next year though?

    4 Dec, 04:43 PMReplyLike1
     
  • justforfun777

    Comments (16) | Send Message

     

    too much time spent making fun of the analysts.

     

    why are you looking at GDP growth rates when talking about oil demand when oil demand figures for those same countries are available?

     

    I dislike articles that spend their time making fun of other oracles and then turn around and make their own guesses of what the future holds. It’s an emotional argument.

    4 Dec, 05:15 PMReplyLike1
     
  • TraderFool

    Comments (504) | Send Message

     

    Re: “too much time spent making fun of the analysts.”

     

    Actually, I like that part – in my nearly 2 decade experience, I’ve seen far too many investors put too much faith on analysts and it’s important to show actual real life examples where analysts are fallible also.

     

    For example, take a look at SDRL. When SDRL was above $40, there were not many analysts telling investors to sell, the prevailing tone was “crude oil is going up, up, up, and buy, buy, buy”.. But when SDRL cuts dividends to zero at $15-$20, they are now downgrading SDRL. Buy at $40, sell at $20? I think you can go to the poorhouse very fast following these “anal-ysts”.

     

    SDRL is not an isolated example. Today, after massive price falls, I see Zacks now telling investors to sell their energy mutual funds after these funds have massive falls …

     

    As for the future, no one knows what is going to happen, you have to follow your own investing/trading thesis. For me, I think SDRL has fallen 75% from peak, cut dividends to zero, so, I am slowly starting to accumulate SDRL, looking to spend up to 4% capital when it finally gets down to say $7. Yes, no guarantee it will fall down that far when today is only $12, but I like the fact that it has fallen from a peak of $48 down to $12 … that’s my unsubstantiated opinion also, and probably emotional as well 🙂 And yes, I’m starting to think of accumulating when analysts consensus is to sell … it worked very well for me over the past decade ….

    4 Dec, 05:36 PMReplyLike3
     
  • samberpax

    Comments (115) | Send Message

     

    justforfun777: I dislike articles that spend their time making fun of other oracles and then turn around and make their own guesses of what the future holds.

     

    ———————-…

     

    Exactly so! I am elevating my standard by lowering theirs. Sad, very sad indeed.

     

    Best,
    -samberpax

    4 Dec, 10:26 PMReplyLike0
     
  • stockdunn

    Comments (245) | Send Message

     

    XOM is my largest holding; also have PBA, SE, and LNCO (oops). However, this Bloomberg article has some “paradigm shift” ideas that should be entered into the conversation. Oil is no longer the only game in town, and that has to be considered. Also, just because our politicians refuse to take climate change seriously, doesn’t mean the rest of the world isn’t taking notice and preparing to do something about it:

     

    http://bloom.bg/12CBfjp

     

    Here is the link to Lockheed-Martin’s compact fusion announcement. These researchers/engineers are the best of the best, I would think, so if they’re making an announcement, they must have something legitimate up their sleeve, I would think:

     

    http://lmt.co/1yJEu5x

    4 Dec, 05:41 PMReplyLike2
     
  • TraderFool

    Comments (504) | Send Message

     

    Hello stockdunn,

     

    Interesting article on Fusion, nice read.
    However, the recent crude oil price fall down to $66 is most likely unrelated to Lockheed-Martin’s fusion piece, as that piece seems more about promoting Lockheed-Martin in research and what they think they could achieve in 5 years time, and still not yet confirmed …. but good to cast a quick glance from time to time on these sort of things ….

     

    If Lockheed-Martin managed to bring this to commercial production at small enough sizes at reasonable prices (that’s a BIG IF), then, I think we first see Lockheed-Martin’s stock price zooms up first a lot more than what we’ve seen so far, before we see global crude oil prices comes down significantly … that’s just my gut feel …

    4 Dec, 05:54 PMReplyLike2
     
  • TraderFool

    Comments (504) | Send Message

     

    PS. Regarding “paradigm shifts”, I would treat that with a huge grain of salt. In 2008, crude oil fell from $147 down to $33, and a lot of articles came out with “paradigm shifts”. If you had invested in crude oil counters then, you would be laughing with +100%-+400% gains when crude makes its way back up to $110 in just 2-3 years …

     

    There is no guarantee we’ve seen bottom in crude yet, but I feel we are now entering a period where Value Investors should start to feel excited on some of the high quality issues that are beaten up hugely, to trade below NAV and trade well below Replacement Costs …

     

    Cheers,
    TF

    4 Dec, 07:17 PMReplyLike1
     
  • stockdunn

    Comments (245) | Send Message

     

    TF: Thanks for your response. I agree, the LMT fusion concept probably has nothing to do with the drop we’ve seen, and any shift would be sometime down the road. Yet, these things sometimes land on your lap before you realized they would.

     

    I haven’t sold any of my oil stocks, but I haven’t added yet, either. Would love to buy some LNCO to bring down my cost basis, but I’m concerned they’ll have to cut, or pull a Seadrill and eliminate, their dividend.

    4 Dec, 11:13 PMReplyLike1
     
  • CheeseLover

    Comments (2) | Send Message

     

    After I read your article http://bit.ly/1thepsy, I was quite impressed with your reasoning and knowledge.
    I have been waiting for a follow-up and this seems to be the one.
    Again I am impressed by your knowledge and your reasoning but I’m a bit disappointed too. Especially by not addressing points 3 and 4 of these 8 major reasons.

    4 Dec, 06:04 PMReplyLike1
     
  • samberpax

    Comments (115) | Send Message

     

    CheeseLover: Again I am impressed by your knowledge and your reasoning but I’m a bit disappointed too. Especially by not addressing points 3 and 4 of these 8 major reasons.

     

    ———————-

     

    Just to refresh, points 3 and 4 of these 8 major reasons:

     

    3) The weakening of the U.S. dollar.
    4) OPEC’s decision to cut supply in November 2014.

     

    Best,
    -samberpax

    4 Dec, 10:41 PMReplyLike0
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Cheeselover, this is the follow up article as you guessed correctly. And you need to give it some time, as I also note.

     

    Please bear in mind that the HERD MENTALITY is like the TITANIC cruise ship. The big ships need a couple of miles to turn….

     

    Regards,
    VD

    5 Dec, 07:28 AMReplyLike1
     
  • TraderFool

    Comments (504) | Send Message

     

    VD,

     

    Agree this is very much a TITANIC cruise ship that will take a few miles to turn … apparently, the weekly US Oil production figure need to show 2 to 3 consecutive week of decline at the very least first. Until then, odds are crude oil will keep falling (short term momentum). I now feel we may be close to bottom, but we are not confirmed there yet, and I won’t be surprised if crude makes $30 very briefly, before a strong and fast recovery once a few of these marginal producers are out of the picture …

     

    Just as Saudis and US are stubborn right now to curtail production, in a year’s time when a few of the US producers goes bust, the Saudis will have achieved their objective and cut production, and just as quick, I see crude oil could rise back to $100 very fast … the US production numbers are always a surprise to markets, I expect the Saudi’s response to also be a surprise to the market when they cut back production in 6-12 months time – those looking for signs will not find it, I believe it will be a surprise to the market when it happen anytime within the next 12 months …

    5 Dec, 09:11 AMReplyLike0
     
  • Go Lakers

    Comments (1377) | Send Message

     

    “Also, the world’s biggest oil consumers are growing at rates that either are in line with 2013 rates or exceed expectations. There is nothing to indicate that global supply and demand imbalance has fundamentally changed in the past six months.”

     

    Whilst I agree with your base thesis and believe that the price of oil is going back up to what are more “normal” levels, some of the biggest consumers of oil on the planet are likely going to use less-and-less of it as time goes on. For example, there are pretty strict rules in place for future vehicle mileage requirements in the US, the EU has been clamping down hard on emissions for a pretty long time and lots of companies are now involved in the business of making energy efficient equipment and machinery. The list is long – GE, Siemens, Caterpillar, Deere, Hitachi, Volvo, Komatsu…..and so on.

     

    The historical environment for oil consumption is becoming more-and-more dated when compared to what the oil consumption environment will look like going forward. It’s hard if not impossible to use the past as an accurate guide to the future.

     

    The future oil consumption environment in two words – different and lower.

    4 Dec, 06:16 PMReplyLike1
     
  • rajprasad

    Comments (450) | Send Message

     

    every article on oil price that I read these days are bullish on oil price. May be one should take opposite view and stay short

    4 Dec, 06:56 PMReplyLike1
     
  • TraderFool

    Comments (504) | Send Message

     

    raj,
    If you are short on crude oil, I don’t see a reason why you need to close your shorts now as crude keeps falling. You should only close it when you see a confirmed uptrend, at least, that’s my view.

     

    Value Investors though are a different breed – they ease their way in specific value stocks, and now, many oil related stocks are trading at below NAV and well below Replacement Costs with strong cashflows during the last oil crisis … these stocks could still fall by another 25%-50% or close to bottom, no one really knows and so, they start to accumulate a little bit at a time … history has shown that crude oil will eventually recover, and they could be looking at +100% returns in 1-3 years time … the Value approach does not require market timing, and crude oil being highly cyclical in nature means we will definitely see $80-$100 crude oil again eventually over the next 1-3 years, we just don’t know exactly when. If it goes back to $100, you can be sure many of these crude related counters will go back up to their former levels, potentially 100%-300% gains …

     

    Mr Market has presented a compelling opportunity, the key is Money Management, accumulate a few high quality counters, and once bought, lock them up in a drawer and don’t worry about the daily price volatilities. In 1-3 years time, the gains of +100%-300% can be had … know the strategies in advance, never allocate more than 15%-20% portfolio to oil related counters at the bottom, and certainly, never go on margins. I have been staying cash majority of my portfolio, I just recently allocate 2% capital on oil counters, and plan to slowly work my way to 15%-20% assuming these stocks could fall up to 50% from current levels … This is a no-brainer approach, I just don’t care about the daily price volatilities.

     

    Cheers,
    TF.

    4 Dec, 07:12 PMReplyLike1
     
  • rajprasad

    Comments (450) | Send Message

     

    TF

     

    i am heavily long on oil and hurting badly but i keep buying as price drops. i am in your camp

    4 Dec, 07:29 PMReplyLike0
     
  • TraderFool

    Comments (504) | Send Message

     

    raj,

     

    Oil futures, stocks or options? I hope it is not leveraged instruments? The trend is still down …

    4 Dec, 07:45 PMReplyLike0
     
 
  • rajprasad

    Comments (450) | Send Message

     

    stocks with covered calls, naked puts no leverage – i can sustain the loss for a long time

    4 Dec, 07:52 PMReplyLike1
     
  • stockdunn

    Comments (245) | Send Message

     

    TF: Care to share what you’re buying?

    4 Dec, 11:17 PMReplyLike0
     
  • rajprasad

    Comments (450) | Send Message

     

    i bought ect voc per eroc and several others

    5 Dec, 12:22 AMReplyLike0
     
  • TraderFool

    Comments (504) | Send Message

     

    stockdunn,

     

    I’m eyeing SDRL – originally, I plan to go in with 4 bullets, at $13.50 (already done), $11, $9 and $7 very roughly speaking, but now, I will most likely try to take advantage of the short term down momentum (I am a trader) to cut loss some and take wait to pick it up at lower prices, and wait for a better technical signal. Allocating just 4% capital for SDRL.

     

    The other 2 counters are HP (this is a Dividend Aristocrat that keeps paying higher dividends every year for over 25 years) and NE (this is a nice Value play), but I haven’t triggered any buys in either yet as Crude keeps falling and the counters keep falling … Again, 4 bullets each, total 12% capital when I’m done all the 3 buys at the bottom.

     

    Originally, I plan to make a “simple” buy approach of just buying at set levels, but the more I study the crude markets fundamentally, the more I realize that I can fine-tune my entry better, so, let’s see if this is successful or not …

     

    How about you? What counters are you looking at?

    5 Dec, 09:23 AMReplyLike0
     
  • TraderFool

    Comments (504) | Send Message

     

    Hello raj,

     

    Glad you didn’t go for futures / options with time expiries – I just don’t know how long these crude oil price can fall – it can keep falling and falling, and the bottom and recovery I believe will be a huge surprise to me.

     

    Personally, I prefer safer, large caps, very liquid stocks that institutional buys with average daily volume greater than 500k to 1000k shares, and try to buy using a combination of writing puts and directly, and sell covered calls also.

     

    Whilst my current list is SDRL, HP and NE, if I find something else better, I’ll most likely drop one for that …

     

    Good luck.

     

    Cheers,
    TF

    5 Dec, 09:29 AMReplyLike0
     
  • rajprasad

    Comments (450) | Send Message

     

    TF

     

    Oil company stock valuation is based on EV/B/D; EV/EBITDA and EV/Reserve; It does not matter whether large cap or debt; In case of low rev they can always curtail drilling and be very liquid to pay down debt. Worse come worse they will sell their reserves for better price than current valuation. We just bid on various leases offered by Chevron and we did not get it as there are numerous buyers willing to pay higher price.

     

    raj

    5 Dec, 06:41 PMReplyLike0
     
  • Carlos San

    Comments (22) | Send Message

     

    This is an awful lot of cut and paste combined with high handed comments intimating the writer is a genius who knows more than everyone else. It is not original analysis. The fact that so many comments suggest this ois “excellent analysis” goes a long way toward explaining the somewhat sad state of oil and gas investment. I’m not hating, but re-read this article. It is just not analysis. Period.

    4 Dec, 07:24 PMReplyLike1
     
  • seanthome

    Comments (49) | Send Message

     

    But how much cheaper will oil go to before it starts to bounce back up?

    4 Dec, 08:07 PMReplyLike2
     
  • noobie107

    Comments (117) | Send Message

     

    That’s impossible to call.
    One could make educated guesses based on the geopolitical actions/goals of the major oil producing countries, changes in demand, etc.
    I’d rather see oil stay around these levels for a while as I accumulate.

    4 Dec, 08:11 PMReplyLike1
     
  • blahblahblahblahblar

    Comments (34) | Send Message

     

    What’s interested me is the issue of sovereign debt and reliance on oil revenues for certain countries.

     

    Looking at Venezuela and Iran for example – the oil price before the crash, at it’s peak…was nowhere near the quoted figures given for these countries to approach break even; so who goes broke first…small shale producers in the USA or the countries that need $150 oil to just break even, or do they just continue to go broke forever?

     

    I don’t think the OPEC decision is targeted solely at US shale plays…there’s others that are in far more pain over this, the rest of the global economy benefits while oil producers suffer a small but probably needed shakeout: I’ve got investments in oil but it’s ok to lose paper money on one part of the portfolio if another part benefits… I think sovereign default would be a lot worse for everyone involved. Oil will go back up in price eventually, and the median price will rise over time as the asset depletes. When is actually not that important unless you need your money tomorrow.

    4 Dec, 08:32 PMReplyLike3
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » blahblahblah,

     

    Please see the excerpt below:

     

    ” On top of that, there are some additional geopolitical clouds on the horizon that can make oil jump by H1 2015. For instance, the current low oil price has brought many OPEC members to their knees, while the holders of those countries’ sovereign debt are toast as long as oil stays at the current levels. Iran, Iraq, Libya, Algeria and Venezuela are not prepared to withstand low oil prices for long and they are now in serious danger of political upheaval at current prices.

     

    According to yesterday’s news from CNBC, the first signs of an escalating social unrest in Venezuela are already there, and things will definitely get worse over the next weeks.

     

    Furthermore, Russia and Saudi Arabia will be anxiously watching the rapid depletion of their sovereign wealth funds, which will make the political situation in these two countries dicey over the next months. “

     

    Regards,
    VD

    5 Dec, 08:05 AMReplyLike1
     
  • rrb1981

    Comments (11) | Send Message

     

    What will be quite interesting to see is if all of the pundits are correct regarding shale production being a “Ponzi scheme” etc.

     

    The sharp increase in production in the US over the past 5 years is simply amazing, however, it would be interesting to see what the overall average decline rate is for the US over the same time period.

     

    I’m inclined to believe that the decline rate is substantially higher in part due to the tremendous number of unconventional wells that have been drilled in the past few years and the fact that they are in the steep part of the decline curve. So, while production has been climbing, it seems that the Saudi’s are hoping to curb drilling and therefore let the decline curve catch up with the industry. With a sustained drop in prices, eventually borrowing base redeterminations will result in at least a moderate decrease in drilling, perhaps even drilling within cash flow!

     

    Also, while my opinions mean very little, I think it is important to point out somewhat misleading comments about certain plays being profitable at $40 or whatever they want to insert. Yes, if lease operating expenses and field level costs, transportation, ad valorem etc are $25-$40 per barrel, then those wells will be cash flow positive as long as pricing remains above that price.

     

    However $25-$40 oil will not provide a decent IRR for new wells. Remember most of these shale wells exhibit very high initial production and have sharp hyperbolic type declines. Producers need to get full payout in the first 12-24 months. Wells might decline 60-70% within the first 24 months. Look at the NPV of many of the Bakken wells at $60/bbl. Not nearly as attractive as when they were $100.

     

    I don’t know what oil pricing will do in the next few months, nor do I know what OPEC and the Saudi’s will do in 6 months. I do however believe that US oil producers will eventually have to reign in drilling budgets as cash flow wanes. I don’t know if that will mean production growth will taper, if production will hold steady with new production offsetting natural decline or if total US production will slowly decrease. I do know that it will be interesting to see it unfold.

     

    And while my opinion isn’t worth much, I believe that we will eventually find some happy medium where US producers can achieve decent IRRs and production can grow modestly. My guess is $75-$80 bbl.

    4 Dec, 08:49 PMReplyLike4
     
  • samiam911

    Comments (13) | Send Message

     

    I thoroughly enjoy VD’s articles, despite the fact that now all 4 of my positions initiated based on his recommendations are down from 30-60%. I still value them because their fundamental analysis, as outlined by VD, shows that they are still good investments; I will hold onto them for the long term.

     

    While VD is great at pointing out value, guessing what will happen to the price of oil will always be speculation. I like the argument given here, but the truth is that no one really knows.

     

    Investors in oil-producing companies should do so because they believe that their fundamentals will allow them to be successful and profitable in any environment of oil pricing.

    4 Dec, 10:45 PMReplyLike1
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Samiam, thank you for your comments but I believe you have to keep in mind two things:

     

    – The recommended entry price for my picks, given that timing matters when it comes to investing. Buying a good company is not enough.

     

    – The investment horizon, given that I am not a day trader.

     

    Regards,
    VD

    5 Dec, 07:32 AMReplyLike1
     
  • samiam911

    Comments (13) | Send Message

     

    VD,

     

    Thanks for your reply. One of the things I appreciate about your articles is always standing by your track record. Given that, here are some of your picks from this year:

     

    CAZFF Recommended 5/15/14 – market price $0.30, currently at $0.14.

     

    PTAXF Recommended 8/26/14 – Market price $0.38, currently at $0.14

     

    LNREF Recommended 6/7/14 – Market price $0.35, currently at $0.19

     

    They have all experienced significant losses (on average 52%). However, I agree that I am not a day trader so if I liked these companies enough to buy them, I would still hold on as long as the fundamentals have not changed. As Buffet said, if you aren’t willing to lose half of your investment in the market, you shouldn’t be there.

     

    I remain long, but the simple fact is that there have been some significant losses in the short term.

    6 Dec, 08:58 AMReplyLike1
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » samiam,

     

    I was wondering why you did not mention:

     

    AEI.T recommended at C$4.95, now at C$6.85, up 40% despite the slump of the energy stocks.

     

    CKE.T recommended at C$0.82, now at C$1.25, up 50% despite the slump of the energy stocks.

     

    CAZ.T was recommended at C$0.24 in May 2014.

     

    LNR was recommended at $0.32 in June 2014.

     

    PTA.V was recommended at C$0.39 AND C$0.25 in October 2014:

     

    http://seekingalpha.co…

     

    and for reference, Oasis (OAS) has dropped from $55 to $14,

     

    Sandridge (SD) from $7 to $2.4

     

    Magnum (MHR) from $8.6 to $3.9

     

    Penn Virginia (PVA) from $17 to $4.8

     

    Quicksilver (KWK) from $3 to $0.40

     

    and many many other producers have returned back to their 2010 levels. I can continue if you want. This might help you see the big picture.

     

    Regards,
    VD

    6 Dec, 10:38 AMReplyLike0
     
  • CAPTAIN SIR

    Comments (7) | Send Message

     

    HEY VD U B DA MAN KEEP NSIPPN DAT 1 BUCK CHAMPAIGN ON yr boat/and kickn ass-ITS A BOAT TIME U CORRALATED GEOPOLY WIT/REALITY==keep dign bro.

    4 Dec, 10:50 PMReplyLike2
     
  • Kevin Hess

    , contributor
    Comments (153) | Send Message

     

    Best comment in this article.

    5 Dec, 09:05 AMReplyLike0
     
  • CAPTAIN SIR

    Comments (7) | Send Message

     

    good advice-keep guzzlin bro/try puttn more geo poly wit/da articles like this-thanks.

    4 Dec, 11:21 PMReplyLike0
     
  • 8596381

    Comments (7) | Send Message

     

    Rrb1981, agree $40/bbl would probably cover variable cost and thus existing producing tight oil wells would not be shut in. But you are right that much higher price needed for new wells to be economic. From what I Recall best locations in Baaken formation could probably be economic for new wells at $65, maybe a little lower. Eagle Ford would be something like $55, believe Niobrara in between. But, many wells have been drilled in less productive parts of these formations and those need much higher oil price to be economic. Again, these are rough, directional estimates. In reality production techniques keep improving, and some companies are will better, or have better locations, than others.

     

    My view is some new tight oil wells would still be drilled if oil stayed below $70, but likely not enough to overcome the rapid depletion from existing wells. I believe we will start to see US production drop sometime in H2 2015, but until then US production keeps going up. Think it will take maybe 6 months for wells already committed to be drilled and completed. After that market should at some point get back to $80-$85, maybe 12 months. But likely to be a volatile ride along the way. I personally think we have not seen bottom yet. Too much downward momentum, global oil production likely to keep increasing for the near term.

     

    Best to prepare for the volatility and try to recognize the opportunities as they play out, IMO. So many things could intervene ( geopolitics, global economic activity, China credit, etc)!

     

    Take care

    4 Dec, 11:22 PMReplyLike1
     
 
  • Nawar Alsaadi

    , contributor
    Comments (432) | Send Message

     

    Excellent article Value Digger, I share your outlook on oil as well. I would strongly advice reading this article as well in regards to the significant risks of $150B in cancelled oil capex in 2015 and a subsequent supply crunch later in the decade. At current prices up to 12.2m barrels in new supply are at risk between today and 2025:

     

    http://bit.ly/12EquNo

     

    Regards,
    Nawar

    5 Dec, 12:03 AMReplyLike1
     
  • Value Digger

    , contributor
    Comments (3665) | Send Message

     

    Author’s reply » Nawar,

     

    Thank you for your compliments and your insightful comment. Yes, the news you mention is another very strong bullish indicator.

     

    Regards,
    VD

    5 Dec, 08:08 AMReplyLike0
     
  • rv3lynn

    Comments (438) | Send Message

     

    The one and singular reason that world oil prices have collapsed is that U.S. shale production has gone from zero to 5 million BOEPD in 5 years.

     

    If this 5 million BOEPD were not on the world market today, where would we be?

     

    We would be short on oil.

     

    Instead, we are long on barrels because every dumba** American oilman that drills a good well immediately turns around and puts all of the cash flow from his good well into ANOTHER well. Plus he borrows a few million bucks to drill a few more wells.

     

    How else can you explain the unprecedented exponential oil production growth in this country?

     

    I wish these geniuses would spend their profits on wine, women, song, jet airplanes, country houses or something, besides plowing every single dollar of profit back into the ground.

    5 Dec, 01:20 AMReplyLike1
     
  • Dr. Z.

    Comments (93) | Send Message

     

    Excellent suggestion for the next shareholders meeting. What were they thinking…

    5 Dec, 02:49 AMReplyLike2
     
  • Goldens

    Comment (1) | Send Message

     

    This is all about the Ukraine. Saudi is the US’s bitch and driving down the price of oil is simply to put the hurt on Russia. Price of oil will bounce back once Russia gets the hell out of the Ukraine. As far as the laws of supply and demand all you need to do is take a look at copper. The LME is sitting at a 5+ year low and the price is below $3. Don’t make the mistake of thinking the markets make any sense. Listen to technicals.

    5 Dec, 09:06 AMReplyLike2
     
  • IOROUSSO

    Comments (19) | Send Message

     

    Good article. This market is not for traders, but for real investors. When you are a true investor you must be cool, sober, analytical but especially well informed. This is exactly what Value Digger is doing. I think his analysis is excellent and his <<cool blood>> will win in the end. Do you really believe that the oil sector will be destroyed? I don’t. But careful don’t spent your OWN money at once, keep them for worst times. There is no other way to make money in these markets. Value Digger you have my respect.

    5 Dec, 09:48 AMReplyLike2
     
  • Holthusen

    Comments (638) | Send Message

     

    Value Digger, thank you for another informative article of Petroleum production, pricing and demand. The amount of comments is indicative of your timely in depth analysis.

     

    You make a statement in your piece that sums up your whole thesis: “new oil is not cheap.”

     

    Any way we look at the supply situation, most new production will continue to come from expensive unconventional means such as shale or tar sands. Surely there are new conventional pockets of crude to be found, but they won’t be Elephants and will probably be expensive “deep water” reservoirs.
    Petroleum remains a key product for Global Energy & Industrial production and current low prices will NOT allow future demand to be satisfied.

    5 Dec, 04:32 PMReplyLike2
     
  • charles hinton

    Comments (2798) | Send Message

     

    pumping oil back into ground makes up alot of demand
    Us reserves….
    http://bit.ly/1vYF4uf

     

    china oil reserves
    http://bit.ly/1vYF4ug

    5 Dec, 05:25 PMReplyLike2
     
  • Brett Fromme

    Comments (6) | Send Message

     

    Value Digger,

     

    I agree with much of what you wrote.

     

    In a recent interview with Jim Cramer, Boone Pickens stated that the Saudis will eventually have to cut production. (my comments: OPEC will not survive if the Saudis let Venezuela, Iran, Algeria, Nigeria, Libya, as well as Russia descend into chaos. Not to mention destabilizing an already fragile world economic situation. When the Saudis cut, oil will soar.) B.P. also stated that the producers will be forced to cut CapEx. As they do US production will come down. Based on this, B.P. thought oil would rebound to $100 by mid-2015. Most people will dismiss Boone Picken’s comments. But when a wise old billionaire oilman speaks, I pay attention.

     

    I think most oil services companies will have a rough 2015 (buying opportunity for HAL, SLB). Also, highly leveraged small producers may be forced into bankruptcy, but stronger producers will benefit by picking up their producing acreage and reserves for pennies on the dollar.

    5 Dec, 11:36 PMReplyLike2
     
  • Holthusen

    Comments (638) | Send Message

     

    Brett, I watched the same interview and although his projects over the past several years have not really been home runs, this slump in pricing is certainly not his first rodeo! As you aptly stated “when a wise old billionaire oilman speaks, I pay attention.”

    6 Dec, 09:23 AMReplyLike0
     
  • Watermellon56

    Comments (451) | Send Message

     

    Thanks for the food for thought.
    Regarding Syria, it seems clear the US has opted to fight a war of attrition in northern Iraq rather than cut the head off the snake in Syria. This approach takes care of a number of problems (high casualties on both sides) and is training a whole new generation of US pilots and drone operators.
    I take your comments regarding portable fusion to be light hearted because the neutron flux off such reactors would kill everyone in the car.
    The greatest proof against Fleischmann–Pons knuckleheaded claims of nuclear fusion at room temperature was that they were alive at the announcement. The thought that Fleischmann & Pons conducted such an experiment in an occupied building should have been grounds for dismissal or incarceration.
    LMT is relying on plasma (not room temperature). This compounds the problems with having some random drunk driving around with a nuclear fusion device. Perhaps LMT can make electricity that is too cheap to meter, which would be big, but it is just speculation and not 5 years away.
    In the end, the House of Saud is still in control of the price of oil. Thank God the Iranians are not in that seat.
    By the way, in 1938, the US producers predicted the US has a 10 year supply of oil. I think producers can only see ten years ahead.

    6 Dec, 09:56 AMReplyLike0
     
  • KiteFlyer

    Comments (36) | Send Message

     

    Value Digger,

     

    Thanks for your article!

     

    It confirms what I have been thinking, although without the sources that you cite!

     

    Geo-politically, the world is a much more uncertain place at present! As for the pace of economic activity in the U. S. and elsewhere, the numbers are always after the fact! Can’t measure what hasn’t happened yet! Prognostication is fine for what it is, but it is just that- a guess, however educated!

     

    Oil prices may have further to decline, I don’t know, but the value of some of the oil stocks, I find compelling at these levels.

    6 Dec, 10:42 AMReplyLike0

Oil & Gas Stocks: ‘Stability At The Bottom’ May Be A Positive Sign

https://i0.wp.com/www.avidtrader.com/wordpress/wp-content/uploads/2012/10/oil_and_gas.jpgby Richard Zeits

Summary:

  • The article provides “correction scorecards” by stock and by group versus commodities.
  • In the past two weeks, oil & gas stocks firmed up, despite the continued slide in the price of oil.
  • Small- and mid-capitalization oil-focused E&Ps were the strongest winners.
  • Emerging markets Oil Majors and Upstream MLPs were the worst performers.

During the two weeks since my previous update, stocks in the Oil & Gas sector demonstrated what an optimist might interpret as “stability at the bottom.” The net effect of another sequence of high-amplitude intraday moves was a slight recovery from the two weeks ago levels across the vast majority of segments and stock groups, as shown on the chart below. It should be no surprise that those groups that had declined the most were also the biggest gainers in the past two weeks.

Most notable is the fact that the descend trend in the Oil & Gas stocks was interrupted (and even marginally reversed) in spite of the new lows posted by the price of oil. One could try to interpret this performance as an indication that the current price levels already discount the market’s fear that the oil price paradigm has shifted. This stability may also indicate that the wave of forced liquidations by hedge funds and in individual margin accounts has run its course and the worst part of this correction may be already behind us.

Even though this recent stock price “stability” is a welcome development, it provides little consolation to investors in the Oil & Gas sector who still see their positions trading far below the peak levels achieved last summer. The correction scorecard graph below summarizes average “peak-to-current” performance by individual stocks that are grouped together by sector and size. Individual stock performance is provided in full detail in the spreadsheets at the end of this note.

Mid- and small-capitalization stocks, in both Upstream and Oil Service segments, remain the worst performing groups, now trading at an average discount to each individual stock’s recent peak price of over 40%, a staggering decline. Large-capitalization E&P independents and large-capitalization oil service stocks are trading at a 20%-24% average discount.

Emerging Markets Oil Majors Post A Strong Decline:

Emerging markets Oil Majors were one of the worst performing categories during the past two weeks:

Petrobras (NYSE:PBR) continued to slide down, moving 12% down since my previous update. Petrobras stands out as one of the most disappointing Oil Majors in terms of stock performance in the past five years, having lost a staggering three-quarters of its value during that period. The company’s market capitalization currently stands at only $62 billion.

· Lukoil (OTCPK:LUKOY) and Petrochina (NYSE:PTR) are other examples of strong declines in the past two weeks, with the stocks losing 8% and 7%, respectively. Lukoil’s performance may in fact be interpreted as “solid,” given the continued deterioration of Russia’s political and credit risk.

A strong contrast is the performance of the three oil super-majors – Exxon (NYSE:XOM), Chevron (NYSE:CVX) and Shell (NYSE:RDS.A) – that gained ~2% during the past two weeks and remain the best performing group in the Oil & Gas sector. I have argued in my earlier notes that, given the combined $0.9 trillion market capitalization of these three stocks, the resilient performance by the Super-majors has effectively isolated the correction in the Oil & Gas sector from the broader markets. From a fundamental perspective, the Super-majors are characterized by very low financial leverage, high proportion of counter-cyclical production sharing contracts (“PSAs”) and the effective hedge from downstream assets, which limits their exposure to the oil price decline.

Small-Capitalization E&P Stocks Bounce Back:

After a dramatic underperformance, small- and mid-capitalization E&P stocks posted meaningful gains in the past two weeks. However, in most cases the recovery is “a drop in the bucket,” given that high-percentage moves are measured off price levels that sometimes are a fraction of recent peak prices. The sector remains a menu of bargains for those investors who believe in a recovery in oil prices.

  • Enerplus (NYSE:ERF): +20%
  • Northern Oil & Gas (NYSEMKT:NOG): +17%
  • Concho Resources (NYSE:CXO): +15%
  • Approach Resources (NASDAQ:AREX): +48%
  • Goodrich Petroleum (NYSE:GDP): +24%
  • Synergy Resources (NYSEMKT:SYRG): +15%
  • Penn Virginia (NYSE:PVA): +17%
  • Comstock Resources (NYSE:CRK): +25%

E&P MLPs Retreat:

Upstream MLPs were one of the exceptions in the E&P sector, declining by an average of 4% in the past two weeks. The largest Upstream MLP, Linn Energy (NASDAQ:LINE) and its sister entity LinnCo(NASDAQ:LNCO), are again trading close to their lows, after having enjoyed a strong bounce a month ago. The previously very wide gap in relative performance between Upstream MLPs and other Upstream equities has contracted substantially which, arguably, makes sense given that both categories of companies participate in the same business, irrespective of the corporate envelope.

Oil & Gas Sector Correction Scorecards:




How Low Can the Price of Oil Plunge?

https://i0.wp.com/www.gulf-times.com/NewsImages/2014/10/27/30d677e0-63da-4004-ac67-2ce174ec36a9.jpgby Wolf Richter

It is possible that a miracle intervenes and that the price of oil bounces off and zooms skyward. We’ve seen stocks perform these sorts of miracles on a routine basis, but when it comes to oil, miracles have become rare. As I’m writing this, US light sweet crude trades at $76.90 a barrel, down 26% from June, a price last seen in the summer of 2010.

But this price isn’t what drillers get paid at the wellhead. Grades of oil vary. In the Bakken, the shale-oil paradise in North Dakota, wellhead prices are significantly lower not only because the Bakken blend isn’t as valuable to refiners as the benchmark West Texas Intermediate, but also because take-away capacity by pipeline is limited. Crude-by-rail has become the dominant – but more costly – way to get the oil from the Northern Rockies to refineries on the Gulf Coast or the East Coast.

These additional transportation costs come out of the wellhead price. So for a particular well, a driller might get less than $60/bbl – and not the $76.90/bbl that WTI traded for at the New York Mercantile Exchange.

Fracking is expensive, capital intensive, and characterized by steep decline rates. Much of the production occurs over the first two years – and much of the cash flow. If prices are low during those two years, the well might never be profitable.

Meanwhile, North Sea Brent has dropped to $79.85 a barrel, last seen in September 2010.

So the US Energy Information Administration, in its monthly short-term energy outlook a week ago, chopped down its forecast of the average price in 2015: WTI from $94.58/bbl to $77.55/bbl and Brent from $101.67/bbl to $83.24/bbl.

Independent exploration and production companies have gotten mauled. For example, Goodrich Petroleum plunged 71% and Comstock Resources 58% from their 52-week highs in June while Rex Energy plunged 65% and Stone Energy 54% from their highs in April.

Integrated oil majors have fared better, so far. Exxon Mobil is down “only” 9% from its July high. On a broader scale, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) is down 28% from June – even as the S&P 500 set a new record.

https://i0.wp.com/maxspeak.net/wp-content/uploads/2014/08/34852468Rick-Santelli-380x190.jpg

So how low can oil drop, and how long can this go on?

The theory is being propagated that the price won’t drop much below the breakeven point in higher-cost areas, such as the tar sands in Canada or the Bakken in the US. At that price, rather than lose money, drillers would stop fracking and tar-sands operators would shut down their tar pits. And soon, supplies would tighten up, inventories would be drawn down, and prices would jump.

But that’s not what happened in natural gas. US drillers didn’t stop fracking when the price of natural gas plunged below the cost of production and kept plunging for years. In April 2012, it reached not a four-year low but a decade-low of about $1.90 per million Btu at the Henry hub. At the time, shorts were vociferously proclaiming that gas storage would be full by fall, that the remaining gas would have to be flared, and that the price would then drop to zero.

But drillers were still drilling, and production continues to rise to this day, though the low price also caused an uptick in consumption that coincided with a harsh winter, leaving storage levels below the five-year minimum for this time of the year.

The gas glut has disappeared. The price at the Henry hub has since more than doubled, but it remains below breakeven for many wells. And when natural gas was selling for $4/MM Btu at the Henry hub, it was selling for $2/MM Btu at the Appalachian hubs, where the wondrous production from the Marcellus shale comes to market. No one can make money at that price.

And they’re still drilling in the Marcellus.

Natural gas drillers had a cover: a well that also produced a lot of oil and natural gas liquids was profitable because they fetched a much higher price. But this too has been obviated by events: on top of the rout in oil, the inevitable glut in natural gas liquids has caused their prices to swoon too (chart).

Yet, they’re still drilling, and production is still rising. And they will continue to drill as long as they can get the moolah to do so. They might pick and choose where they drill, and they might back off a smidgen, but as long as they get the money, they’ll drill.

Money has been flowing into the oil and gas business like a tsunami unleashed by yield-desperate investors who, driven to near insanity by the Fed’s policies, do what the Fed has been telling them to do: close their eyes and hold their noses and disregard risk and hand over their money, and borrow money for nearly free and hand over that money too.

Oil and gas companies have issued record amounts of junk bonds. They’ve raised record amounts of money via a record number of IPOs. They’ve raised money by spinning off assets into publicly traded MLPs. They’ve borrowed from banks that then packaged these loans into securities that were then sold. The industry has taken this cheap money and has drilled it into the ground.

This is one of the consequences of the Fed’s decision to flood the land with free liquidity. When the cost of capital is near zero, and when returns on low-risk investments are near zero as well, or even below zero, investors go into a sort of coma. But when they come out of it and realize that “sunk capital” has taken on a literal meaning, they’ll shut off the spigot.

Only then will drilling and production decline. As with natural gas, it can take years. And as with natural gas, the price might plunge through a four-year low and hit a decade low – which would be near $40/bbl, a price last seen in 2009. The bloodletting would be epic. To see where this is going, watch the money.

https://i1.wp.com/www.independent.co.uk/incoming/article9783416.ece/alternates/w620/pg-58-oil-getty.jpg

Don’t Count On A Major Slowdown In U.S. Oil Production Growth

https://i1.wp.com/upachaya.com/wp-content/uploads/2014/05/fracking.jpgby Richard Zeits

Summary

  • The presumption that North American shale oil production is the “swing” component of global supply may be incorrect.
  • Supply cutbacks from other sources may come first.
  • Growth momentum in North American unconventional oil production will likely carry on into 2015, with little impact from lower oil prices on the next two quarters’ volumes.
  • The current oil price does not represent a structural “economic floor” for North American unconventional oil production.

The recent pull back in crude oil prices is often portrayed as being a consequence of the rapid growth of North American shale oil production.

The thesis is often further extrapolated to suggest that a major slowdown in North American unconventional oil production growth, induced by the oil price decline, will be the corrective mechanism that will bring oil supply and demand back in equilibrium (given that OPEC’s cost to produce is low).

Both views would be, in my opinion, overly simplistic interpretations of the global supply/demand dynamics and are not supported by historical statistical data.

Oil Price – The Economic Signal Is Both Loud and Clear

The current oil price correction is, arguably, the most pronounced since the global financial crisis of 2008-2009. The following chart illustrates very vividly that the price of the OPEC Basket (which represents waterborne grades of oil) has moved far outside the “stability band” that seems to have worked well for both consumers and producers over the past four years. (It is important, in my opinion, to measure historical prices in “today’s dollars.”)

(Source: Zeits Energy Analytics, November 2014)

Given the sheer magnitude of the recent oil price move, the economic signal to the world’s largest oil suppliers is, arguably, quite powerful already. A case can be made that it goes beyond what could be interpreted as “ordinary volatility,” giving the hope that the current price level may be sufficient to induce some supply response from the largest producers – in the event a supply cut back is indeed needed to eliminate a transitory supply/demand imbalance.

Are The U.S. Oil Shales The Culprit?

It is debatable, in my opinion, if the continued growth of the U.S. onshore oil production can be identified as the primary cause of the current correction in the oil price. Most likely, North American shale oil is just one of several powerful factors, on both supply and demand sides, that came together to cause the price decline.

The history of oil production increases from North America in the past three years shows that the OPEC Basket price remained within the fairly tight band, as highlighted on the graph above, during 2012-2013, the period when such increases were the largest. Global oil prices “broke down” in September of 2014, when North American oil production was growing at a lower rate than in 2012-2013.

(Source: OPEC, October 2014)

If the supply growth from North America was indeed the primary “disruptive” factor causing the imbalance, one would expect the impact on oil prices to become visible at the time when incremental volumes from North America were the highest, i.e., in 2012-2013.

Should One Expect A Strong Slowdown in North American Oil Production Growth?

There is no question that the sharp pullback in the price of oil will impact operating margins and cash flows of North American shale oil producers. However, a major slowdown in North American unconventional oil production growth is a lot less obvious.

First, the oil price correction being seen by North American shale oil producers is less pronounced than the oil price correction experienced by OPEC exporters. It is sufficient to look at the WTI historical price graph below (which is also presented in “today’s dollars”) to realize that the current WTI price decline is not dissimilar to those seen in 2012 and 2013 and therefore represents a signal of lesser magnitude than the one sent to international exporters (the OPEC Basket price).

(Source: Zeits Energy Analytics, November 2014)

Furthermore, among all the sources of global oil supply, North American oil shales are the least established category. Their cost structure is evolving rapidly. Given the strong productivity gains in North American shale oil plays, what was a below-breakeven price just two-three years ago, may have become a price stimulating growth going into 2015.

Therefore, the signal sent by the recent oil price decline may not be punitive enough for North American shale oil producers and may not be able to starve the industry of external capital.

Most importantly, review of historical operating statistics provides an indication that the previous similar WTI price corrections – seen in 2012 and 2013 – did not result in meaningful slowdowns in the North American shale oil production.

The following graph shows the trajectory of oil production in the Bakken play. From this graph, it is difficult to discern any significant impact from the 2012 and 2013 WTI price corrections on the play’s aggregate production volumes. While a positive correlation between these two price corrections and the pace of production growth in the Bakken exists, there are other factors – such as takeaway capacity availability and local differentials – that appear to have played a greater role. I should also note that the impact of the lower oil prices on production volumes was not visible in the production growth rate for more than half a year after the onset of the correction.

(Source: Zeits Energy Analytics, November 2014)

Leading U.S. Independents Will Likely Continue to Grow Production At A Rapid Pace

Production growth track record by several leading shale oil players suggests that U.S. shale oil production will likely remain strong even in the $80 per barrel WTI price environment. Several examples provide an illustration.

Continental Resources (NYSE:CLR) grew its Bakken production volumes at a 58% CAGR over the past three years (slide below). By looking at the company’s historical production, it would be difficult to identify any impact from the 2012 and 2013 oil price corrections on the company’s production growth rate. Continental just announced a reduction to its capital budget in 2015 in response to lower oil prices, to $4.6 billion from $5.2 billion planned initially. The company still expects to grow its total production in 2015 by 23%-29% year-on-year.

(Source: Continental Resources, October 2014)

EOG Resources (NYSE:EOG) expects that its largest core plays (Eagle Ford, Bakken and Delaware Basin) will generate after-tax rates of return in excess of 100% in 2015 at $80 per barrel wellhead price. EOG went further to suggest that these plays may remain economically viable (10% well-level returns) at oil prices as low as $40 per barrel. The company expects to continue to grow its oil production at a double-digit rate in 2015 while spending within its cash flow. EOG achieved ~40% oil production growth in 2012-2013 and expects 31% growth for 2014. While a slowdown is visible, it is important to take into consideration that EOG’s oil production base has increased dramatically in the past three years and requires significant capital just to be maintained flat. Again, one would not notice much impact from prior years’ oil price corrections on EOG’s production growth trajectory.

(Source: EOG Resources, November 2014)

Anadarko Petroleum’s (NYSE:APC) U.S. onshore oil production growth story is similar. Anadarko increased its U.S. crude oil and NLS production from 100,000 barrels per day in 2010 to close to almost 300,000 barrels per day expected in Q4 2014. Anadarko has not yet provided growth guidance for 2015, but indicated that the company’s exploration and development strategies remain intact. While recognizing a very steep decline in the oil price, Anadarko stated that it wants “to watch this environment a little longer” before reaching conclusions with regard to the impact on its future spending plans.

(Source: Anadarko Petroleum, October 2014)

Devon Energy (NYSE:DVN) posted company-wide oil production of 216,000 barrels per day in Q3 2014. While Devon will provide detailed production and capital guidance at a later date, the company has indicated that it sees 20% to 25% oil production growth and mid‐single digit top‐line growth “on a retained‐property basis” (pro forma for divestitures) in 2015.

The list can continue on.

In Conclusion…

Based on preliminary 2015 growth indications from large shale oil operators, North American oil production growth in 2015 will likely remain strong, barring further strong decline in the price of oil.

No slowdown effect from lower oil prices will be seen for at least six months from the time operators received the “price signal” (August-September 2014).

Given the effects of the technical learning curve in oil shales and continuously improving drilling economics, the current ~$77 per barrel WTI price is unlikely to be sufficient to eliminate North American unconventional production growth.

North American shale oil production remains a very small and highly fragmented component of the global oil supply.

The global oil “central bank” (Saudi Arabia and its close allies in OPEC) remain best positioned to quickly re-instate stability of oil price in the event further significant decline occurred.